The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP

Forex

With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.

The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.

“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.

He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.

His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.

Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.

Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.

Lagarde new ECB president

Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.

Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.

It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.

However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.

Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.

Non-Farm Payroll better than expected

Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.

It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.

The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.

However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.

As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.

Morning Note: Aussie rallies on election win, equities slow

Forex
Indices
Morning Note

It was a tentative start to the trading week as markets digest the last few day’s ructions, ongoing news flow around US-China trade and mounting concerns about what is going on between the US and Iran. 

The main European bourses have opened in the red although the FTSE 100 put up something of a fight to just about hold in the green. Can probably thank the weaker pound for this. Italian stocks are being hammered this morning.

US S&P 500 e-mini futures are green now having seen the broad market turn south on Friday. Stocks fell in the last couple of hours of trading last week on reports US-China trade talks were on hold. The market remains at the mercy of commentary and news flashes around these talks and it is wise to try and put some ear muffs on at times. 

Australian banking stocks were the main winners as the win for the Liberal-National coalition removed the risk of certain regulatory moves.  

Forex – Aussie wins

AUDUSD – ScoMo’s miracle victory has lifted the Australian dollar a touch, but bulls shouldn’t get too excited yet. AUDUSD firmed up on the first session of trading since the result of the election became known. Having fallen close to decade lows on the 0.68 handle, the pair has firmed on the 0.6920 level. Resistance seen at 0.69440, the 23% retracement of the down move from the April highs. Whilst the election may deliver some short-term relief for Aussie bulls, it’s the RBA that really matters. The market is betting on a rate cut this summer and seems likely, the question is whether this is the first in a cycle of cuts or is one-and-done.  Nevertheless, having taken a look at decade lows, bulls will be hopeful that we have seen a reversal in the long-term down trend.

Elsewhere in FX, sterling remains under the cost. GBPUSD is struggling below 1.28 and is showing few signs of being able to mount much of a rally. The ongoing political uncertainty and the open war in the Tory party will act as drags on risk sentiment. GBPUSD was last at 1.2730 and with support seen at 1.2710, the Jan 10/11 lows. 

And coming up this week we have a potentially volatile period for GBP given the European Parliament elections take place on Thursday through to Sunday. We should also be on guard for any EUR spasms if there is a surge in populist parties threatening to shake things up in Brussels. We’ve heard all this before, but nevertheless markets remain highly sensitive to news flashes – only last week the euro was moving on a series of comments made by Italy’s ruling populist parties.  

Oil higher

We have some can kicking but it rather looks like OPEC is leaning to an extension and could adjust the volumes. Compliance was at 160% in April, which gives ample scope to raise output or reduce the production curb commitments. Brent remains bid above $73 on this as well as the mounting tensions between the US and Iran

Morning Note: European markets lower, oil gains, pound under pressure

Forex
Indices
Morning Note

European markets opened lower, with the major equity indices pulling back after Wednesday’s kneejerk move higher amid a very noisy, confusing picture for investors regards trade, growth and interest rates.

The FTSE 100 lost 20 points to retreat to 7275, losing the 7300 handle achieved yesterday. Auto stocks are weaker this morning – perhaps a dose of reality in the cold light of the morning after yesterday’s gains. 

Markets recovered ground yesterday, switching from red to green sharply as reports suggested the US will delay auto tariffs by six months. This, combined with some more jawboning from Mnuchin on trade talks, tended to ease the worries about the US-China trade spat. 

But the US president add pressure elsewhere – issuing an executive order banning US firms from working with Huawei. Lots and lots and lots of noise from all sides – making this a tough market to be in.

SPX bounced off support around the 2817 level, which was a big area of resistance in the not-too-distant past, to close at 2,850. 

Bonds bid

The 10-year Treasury remains below 2.4%, with bonds finding bid as the US retail sales and industrial production numbers missed yesterday. 3m-10yr inversion again flashes the recession amber lights – expect to hear more of this talk even though the US seems a long way from recession right now (3.2% print GDP, consumer spending and retail sales at multi-year highs, unemployment at 50-year lows…I could go on).

Oil rallies

Oil – Brent has rallied above $72. Bullishness seems to be down to mounting geopolitical risks in the Middle East. Specifically, oil is higher because the market is worried that the US and Iran are at risk of a flare-up. Oil rose despite a surprise build in US inventories, which were up 5.4m barrels in the last week according to yesterday’s EIA data. We also saw a build in inventories in Cushing.  

Meanwhile the IEA revised its demand growth outlook lower by 90k barrels a day to 1.3m. Whilst this was bearish, the group also highlighted the significant supply side uncertainty – Iran, Venezuela, Libya etc. As we noted in a recent strategy note on oil, the IEA says the supply picture is ‘confusing’. 

Sterling under pressure

FX – Unemployment data from Australia overnight came in weaker and leads us to assume the RBA will cut over the summer (or winter). Although employment rose, jobs growth seems likely to slacken. The RBA has made it perfectly clear that should inflation or unemployment not improve it will be cutting soon. This may well create further downside on the Aussie, which is of course under pressure from the whole China-trade-growth story.

AUDUSD is seriously threatening the 0.69 level on the downside. There is a lot of pressure there and it could go, which would open up move to 2016 lows at 0.68. We’re at multi-year lows here so there is a lot of support to contend with. Whether AUDUSD gets squeezed lower still though will depend on whether the RBA signals it’s one (maybe two) and done, or if it’s embarking on a longer-term easing cycle. 

GBPUSD remains below the 1.2860 level having breached this important support yesterday. Brexit worries abound – it’s either no deal or no Brexit by the looks of things. Next up we could see it slip to the mid-Feb lows around 1.2780. Below that we start to consider a return to the 2019 lows around 1.24 as a possibility. The rebels are putting their pieces in place to oust May if (when) her Brexit bill fails against for the umpteenth time.  Meanwhile as we noted yesterday’s note, amid a broad downturn in risk appetite the pound is exposed. EURGBP is advancing past the 0.87 marker and was last at 0.874, pushing up to 0.88 and the Feb highs.”

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