Waiting for Armageddon

​​​​​Today's news headlines:

  • ‘UK steps up Brexit preparedness for firms as deadline looms’. The UK’s tax authority will automatically issue more than 88,000 companies with an Economic Operator Registration and Identification Number over the next two weeks. Without it, firms will no longer be able to trade with the EU after Oct 31st. Chancellor Sajid Javid said that the move would help ease the flow of goods at borders, supporting business growth. The British Chamber of Commerce has warned that many firms still need further clarity on post-exit issues such as customs procedures, tariffs, and quotas. (Bloomberg)
  • ‘US and Japan in race to finalise partial trade deal’. A partial trade deal between the US and Japan could be finalised as early as next month, as they seek to iron out any final issues. The move could deliver some relief to a climate of rising global tensions and increasingly protectionist trade moves. The ‘mini-deal’ would see Japan opening up its agricultural market to American goods in exchange for cuts to some US industrial tariffs. An agreement would give Donald Trump something to show for his disruptive global trade regime. (Financial Times) 

Race to the bottom down at Jackson Hole

The continued preoccupation with monetary policy easing is based on a mistaken premise and distracts from the needed remedy: fiscal policy action. Of the remaining key events left this week, it's safe to say that the two at the forefront of investors' minds are the Federal Reserve' meeting minutes (released this evening) and the Jackson Hole Symposium (Thursday – Saturday). The reason for this preoccupation is natural enough. Given the gradually weakening economic backdrop, markets are wondering what more central banks can do to stimulate the global economy and forestall a global recession. 

The market's expectations are quite high in that respect; government bond yields in developed markets, a key indicator of central bank rate projections, continue to fall each week. For example, 30-year German government bonds are due to be auctioned today with a 0% coupon, which means for the first time ever an investor is willing to accept no return for a 30-year loan to the German government.

The policy prescription expected to come out of the combined meeting for central bankers in Jackson Hole, Wyoming, is less clear. The Fed has already cut interest rates, with a further two 25bp cuts expected in the September and October meetings respectively. The European Central Bank is widely expected to decrease its deposit rate further into negative territory, along with some capital tiering which would insulate commercial banks—and ostensibly increase lending—from the lower rate move. Most other central banks are simply following along on the journey lower. This is all already baked into the current data and then some.

While the German government has seemingly awoken to the inconsistency of its fiscal policy spending with an economy ostensibly in recession, the trigger point for further investment is apparently, Armageddon. The Trump administration appears in no hurry to pass investment initiatives, having expended all its political capital on a regressive tax policy in 2016. 

Bottom line: Hoping that the central bankers can pull a rabbit out of a hat this weekend is misguided. Central banks will likely calibrate policy lower in line with economic conditions, but the heavy lifting must come from the government because the private sector is under too much political uncertainty to make a meaningful contribution at this late stage.

GBP/USD

Sterling briefly jumped to a high of 1.2179 against the Dollar following comments from German Chancellor Angela Merkel that that European Union would think about practical solutions to the Irish backstop issue. The spike looks to have been an overreaction but goes some way to demonstrate the effect of positive Brexit news on the Pound’s fortune. The pair has lost some ground but is still trading in an upward trend from the mid-August lows.

GBP/EUR

Sterling’s move against the Euro was slightly less pronounced, but the pair still finished the day on a high. This morning, some of the positivity has subsided as scepticism remains that a new Brexit deal can be agreed, but markets will look for any positive stories when Boris Johnson meets Angela Merkel later today. As with Cable, the upward trend remains, but the pair still sits below the year-to-date trading range.

EUR/USD

The pair has broadly been trading in a 30-40 pip range so far this week due to a lack of fundamental data. The minutes from last month’s Federal Reserve meeting will be released later today, but the consensus is that they are now outdated enough not to alter overall sentiment. Significant political events in Italy have also failed to move markets as participants prefer to adopt the wait-and-see approach.