“I find it hard to tell you, I find it hard to take, when people run in circles it’s a very very, Mad world”. Eternal lyrics from Tears for Fears and one can’t help but draw some parallels to everything going on in markets currently. There’s no doubt markets have proven to be very interesting thus far this year. The constant press to record highs into the new year was quickly replaced with doubt and concerns as trade war talks increased and despite a slow recovery back higher from the Feb/March lows (which ruled out thoughts of a larger correction back lower), we are still yet to see fresh highs (with the exception of the UK’s FTSE in May and the US’s NASDAQ this month).
Sentiment is now turning lower once again however and it’s beginning to feel like we’re all running in circles as nations trade taxes and tariff penalties in retaliation. Is this an economic version of war? This week alone equities have faced selling across the board and as we enter into the summer lull, almost all major global indices are in the red for June, with the exception of the NASDAQ. It could be a case of the old adage coming to fruition, “sell in May and go away” – but there is a lot more to it. In fact it’s not even a one way street, there’s no doubt some will suffer from trade wars and others will benefit. Even yesterday the US pressed allies to end all crude imports from Iran, resulting in a surge in the WTI price which rallied over 4% to over $70/bbl which helped energy companies higher so over the coming weeks and months there will almost certainly emerge winners and losers. The biggest loser however will be the idea of global trade – especially if this gathers momentum
Tit for tat trade tariffs across the globe could well create major disruption in international trade but they are not the only concern on the horizon. For the last 6 months there have been plenty warning that Europe still faces considerable risks, both politically and fundamentally, with concerns that a removal of ultra-accommodative easing could send the reason back into a downward spiral. That might be a bit extreme but there is now doubt the ECB’s tone on QE and normalization has softened somewhat. This is already evident as this time last year we were saw the beginning of Europe’s taper tantrum, we’re now looking over 1.5 years from that point to when QE might actually finish, and as we currently sit the region is unlikely to see any interest rates increases for another year at the very least. The Euro has felt that shift and the single currency is broadly weaker vs its G7 counterparts outside of SEK and GBP.
The pound has been the notable underperformer in recent months, GBPEUR sits towards the low end of its 4 month range and a drop from here could well see a move back below 1.1200 (above .8930 area in EURGBP). GBPUSD is just holding above 1.3200 and the rising trend line which marked its accent from post-Brexit lows and the rally back higher which started in Jan 2017. A break below 1.3150 technically opens up a larger move lower, but the 1.3000/1.3100 area still provides some interesting support. The changing of the guard on the BOE has provided some interesting headline fodder the last couple of days and GBP has felt the pinch from that. John Haskel is replacing Ian McCafferty in the MPC.
McCafferty has been one of the more hawkish members of the panel and even yesterday he was casting out warnings for the BOE saying they shouldn’t “dally on raising interest rates” as it could cause a greater shock to the economy. No surprise here, McCafferty was one of three dissenters at the last BOE meeting who voted for a hike but his departure leaves a space and in steps Haskel. His comments suggesting that the BOE has scope to cut rates further should the economy require, as well as increase QE should the UK see economic downturn accelerate paints a completely different picture for the next BOE meetings. The BOE have replaced a hawk with a dove and for the pound this favours additional weakness. I could talk further about Brexit but once again we’d just be running in circles. The fact is no one has a clue what’s happening. PM may is still struggling to even appease her own government and while we see plenty of headlines, we’re seeing no product. So let’s keep this simple; “No deal” Brexit bad for pound: Customs union and watered down Brexit good for pound.