Market News & Insights
21 December 2017

UK Stuck in Second Gear as the Rein Starts to Fall

Given the year we’ve had, I think its fitting that we end 2017 in the customary tone-deaf chorus of “should auld acquaintance be forgot”. 2017 has seen longstanding friendships tested, with policies like Brexit, NAFTA, Trans Pacific Partnership, to name but a few all testing long term partnerships. The story so far however tells us that perhaps friends can be likened to assets and when that asset is rising in value it’s probably best you hold onto them. Given the year we’ve had, I think it fitting that we end 2017 in the customary tone-deaf chorus of “should auld acquaintance be forgot”. 2017 has seen longstanding friendships tested, with policies like Brexit, NAFTA, Trans Pacific Partnership, to name but a few all testing long term partnerships. The story so far however tells us that perhaps friends can be likened to assets and when that asset is rising in value it’s probably best you hold onto them.

On June 23rd 2016 when the UK stunned the world and voted to leave the EU, many analysts felt it would negatively impact both parties equally. However, the UK this year has certainly taken the brunt of this negativity. Latest forecasts from the European Commission show the UK growth slowing to just 1.1% by 2019, which would be close to half the EU average and below Italy, Spain and Greece. Negotiations have certainly taken their toll on both the UK’s economy and political stability, both factors which likely investors shudder at. Theresa May certainly will be happy to see the back of December in a month where she was defeated in the House of Commons and forced First Secretary of State Damian Green to resign, making him the third Cabinet minister to quit in two months. It seems the UK couldn’t be in a worse shape to face the more trying matters on hand in the negotiations.

Over in the US, we saw the impact of what a united party can achieve, with the House of Representatives voting 224 to 201 in favour of passing Trump’s tax reforms. The bill has seen the US 10 year yield curve steepen over the past couple of day, where it is now trading at nine month highs. Interesting observation from CITI “Over the past three years, the average yield gain in US 10y from mid-December to year-end has been 20bps.” The news however has failed to ignite a stronger dollar as it continue to trade within its recent ranges with EURUSD trading at 1.1875 and GBPUSD 1.3378. Friday’s PCE release could well shift the greenbacks fortunes.  Over in the EU, markets seem to be ignoring any potential fallout from the Catalonia elections which take place today.  Spanish yields on the day are trading flat, but we may well see this shift pending the outcome. With the ECB scaling back on QE at the start of next year, these yields could be steepened as a result. Otherwise it has been a quiet week on the data front for the EU, and with no other releases of note the happenings in Spain will drive markets into the New Year.

Today the calendar is on the light front. We have the final reading US third-quarter GDP in the afternoon with the consensus for an upward revision from 3.1% to 3.3%. After this we consumer confidence data from the euro area which is expected to remain at 0.

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