Market News & Insights
24 May 2018

Risk Off

Plenty of topics up for the discussion this morning and all with the same common denominator; risk. The Turkish central bank hiked rates by 300bps to 16.5 percent yesterday, taking its lead from Argentina who earlier this month hiked rates to 40 percent! Emerging economies are under substantial stress with raising US Treasury yields, stronger USD and higher oil prices, this coupled with both Turkey and Argentina issuing over 50 percent of the countries invoices in USD. Last night’s FOMC minutes may have eased this pressure somewhat by cooling the notion of 4 rate hikes this year, stating that they were happy for inflation to run higher to avid a policy error.

Staying with the US, and talks around a new trade ‘structure’ with China are on-going. However comments from Trump’s Twitter would suggest we are a long way off getting anything finalized, stating it was “too hard to get done”. NAFTA talks don’t appear to be going much better, with Trump’s administration threatening with a 25 percent tariff on imported vehicles which is designed to put pressure on Mexico, while Trump called Canada ‘very spoiled’ and difficult to deal with. However it’s not just the US who are having difficulty with negotiations, you only have to look at Brexit to see how painfully slow negotiations can take. Love him or hate him, Trump does put all his cards on the table on day one, where we are nearly 2 years on from the Brexit vote and still none the wiser on what May wants.

Yesterday we had an influx of data, starting with the euro area where the slowdown in Q1 looks to have spilled over into Q2. French and German PMI’s hit their lowest levels in over a year and heading towards the significant 50 mark where below this signals contraction. Geo-political risk in Italy is also weighing on eurozones third largest economy with the 10 year yield hitting 2.45 percent, its highest level since 2015. UK data also had a weaker than expected inflation figure which meant that wage growth is now rising faster than inflation. With fuel prices on the rise, coupled with some increase in tax, we may see this trend reversed. For now though, the consumer seem happy to spend their higher wages, with this morning retail sales figure confirming this, coming in at its highest level in nearly a year.

Other data of note will be the ECB’s Monetary Policy minutes. The ECB have acknowledged that there is a slowdown in Q1. What we will be looking out for is further thoughts on the reason for the slowdown, any remarks around QE and if this slowdown may prolong this bond buying and ultimately where they see rates going.