Is Brexit Beginning to Bite?

It’s 09:30 on a Friday morning in the United Kingdom, and possibly for the 1 billionth time this hour, the word Brexit has been mentioned again.

8 months since the vote to leave the EU, and the markets still cannot decide what the fundamental picture is for the UK.

On the face of it, the economic data points have been reinforcing of the concept of a resilient Sterling, attracting overseas custom with its devalued currency. Inflation was expected to rise, and with it, the oncoming of increased interest rates from the BOE.

However two factors have stayed that point of view this week. Firstly, last week inflation figures for January arrived somewhat below expectation. A CPI increase of 1.8% was indeed the highest since 2014… but it was below the analysts’ expectations.  At the time, this didn’t matter too much as markets were still in thrall of the ongoing opera that is The Donald.

UK inflation January 2017
UK inflation January 2017


However retail sales figures from this morning start to change the context of the recent CPI data, with data from the Office of National Statistics showing that retail sales figures had fallen in January by 0.3% vs. the expected gain of 0.9% – this coming in the light of a fall of 2.1% in December.

UK Retail Sales January 2017
UK Retail Sales January 2017


What these 2 charts show in terms of data is that inflation is increasing, and overall, consumers are not consuming.

This could be a dangerous cocktail for the UK economy. No further evidence of that is needed than in the Sterling Futures contract. Where cable saw a massive repricing just before the data. Falling from $1.2513 to $1.2392 by the time the data had cleared.


Sterling Price Action 17 February 2017
Sterling Price Action 17 February 2017



For a while it seemed Cable could have shaken off its sensitivity for at least the short term, but reactions like this show just how vulnerable the currency is to speculation surrounding the outcome of Brexit.

On a day where Tony Blair has also resurfaced to lead the pro EU fight, the dark clouds of uncertainty have begun to gather once again over the UK and it’s currency.





Has Draghi Saved the Eurozone? 

With Mario Draghi announcing a growing confidence the Euro area’s prospects, the Euro currency didn’t exactly follow suit. Since last week the single currency has fallen from $1.08440 to near $1.06500 at the time of writing.



Euro Price Action 7 Feb 2017
Euro Price Action 7 Feb 2017



Clearly, traders had priced in the potential for a much larger tapering announcement at this meeting. However, the sell-off hasn’t diminished the Eurozone’s appeal this year.

The ECB will cut its bond-buying from 80 billion to 60 billion in April 2017, and seek to extend this program until he end of the year.

Traders have clearly reacted to Draghi’s concern that the current trend in inflation is highly correlated with the increase in energy prices, and that monetary policy may still be needed for support. In this context, the current euro sell off makes sense. However it could be viewed that Draghi was playing his cards close to his chest.

Amidst all the claims of currency manipulation, it cannot be argued that the current exchange rate for the Euro against the dollar is very favourable for the Eurozone. The ECB may see an opportunity here by using rhetoric to suppress the single currency just enough for a possible inflation overshoot – while starting the process of reeling in the asset purchases now. Viewed like this, Draghi has played this move very well.


Weekly Trading Forecast 6 February 2017

A look at a chart for EUR/USD from last week would probably tell you all you needed to know about the markets as traders got topped and tailed trying to follow conflicting fundamentals. In spite of President Trump’s immigration ban, the dollar strengthened early in the week while equities and US Treasuries sold off. However, any fear that Trump’s ban would dent the giants in the technology sector were waylaid when Facebook smashed earnings (and successfully swept a small $500 million law suit under the rug). However economic data in Eurozone continued to show signs of strength, and the Euro further rallied as Wilbur Ross called the Dollar too strong. But the effect was only short lived as ADP Employment data foreshadowed a strong NFP report (227k vs. 157k expected), making the Fed appear overly cautious in holding rates on Thursday.

The week ahead starts with some sentiment indicators from China, giving us the first idea of whether the risk on sentiment has carried on into the new week. It’s very unlikely that these points will come in below expectation, but traders will be looking for an overshoot in order to get long European equities. With the Trump Administration labelling Germany a “currency manipulator” more eyes than usual may be watching German data points this week, the first of which being Construction PMI expected at 54.5.

Tuesdays first market mover may come in the form of German Industrial Production for Dec, expected at 0.5%, this figure should support the positive sentiment gathering pace across Europe. The Halifax House Price Index for the UK may draw additional scrutiny this week in light of the Brexit White Paper, with the year on year figures expected show positive growth of 6.2%. On Tuesday evening traders may also look at the US Balance of Trade. This figure really shouldn’t change too much from the previous ($-45.2B) however given President Trump’s penchant for mentioning trade this could become an interesting indicator of President Trump’s impact.

On Wednesday, we’ll focus once again on Crude Oil, with the previous week printing a build in US inventories of 6.466 million barrels, inventories are only expected to grow mildly as OPEC production cuts continue to take effect.

German Balance of trade data for December is due on Thursday morning, but by this stage, December data perhaps may not have as much of an impact as more forward looking data points. US Initial Jobless Claims for February are expected at 247.4k, and should be relatively stable in light of last week’s NFP data.

It may be worth getting up early on Friday to see the China Balance of Trade data drop. Previously, exports were down 6.1% while imports increased by 3.1%. Traders will be keen to see how this will balance as China now bizarrely takes the US’s place as the champions for global free trade. We also get the UK Balance of Trade data at 09:30 on Friday, expected to show a deficit of £2.7 Billion, but this will be 2016 data, and although may cause some knee jerks, should not have any long last direction effect. And we close the week with the preliminary US Michigan Consumer Sentiment figure for February, expected at 97.8. This figure has been riding high for a few months now, suggesting the current Dollar/Equities bull run may not be over.




Given the above, my view for the week ahead is as follows


10 Year US Treasury Notes


Markets have priced in the current rate of inflation, and scheduled rate rises. But have not factored in the Trump effect. As the risk of more executive orders grows, investors may begin to return to safe heaven assets, pushing bond prices up. This could be especially true if more comments emerge claiming a strong dollar is hurting the US economy.


S&P 500


There are a few fundamental factors pulling on the S&P500 at the moment. The prospect of reduced regulation and strong company earnings pushes the index up, but system risks from rogue tweets, and the impact of executive orders keeps the index from rallying strongly. The S&P could range between 2280 and 2250



Keeping in mind cable spent most of the week pricing in a bumper NFP figure and unchanged BOE interest rates, there could be some surprises here. MPs may not like the Brexit White paper, but it is the document that many had asked for. And with conditions of Brexit now required to go through Parliament, the expectation of harsh Brexit continue to decrease. The UK currently is benefiting from the devalued currency, and so data points are expected to further support the current bullish momentum.



The Euro continues to grind higher since the start of the year, and right now going Long Euro on the 1st of Jan seems like it would have been the best trade of the year. There may be a technical limit to this as price reaches some near term resistance. But the positive fundamental picture in Europe continues to support the single currency – especially when you consider the current situation with Italian Banks, and Deutsche Bank.


Crude Oil


Oil prices should remain supported by the OPEC production cuts, but let’s not forget that at these prices, competitors will be getting back into production. Considering the last Baker Hughes rig count added 18 facilities to the already present 712, some downward pressure could start to creep in. However for now, it is still winter in the northern hemisphere which will help OPEC’s cause.



Is This The End of The Trump Trade?

Since the November US election, global equities have broadly rallied, with the S&P and Dow Jones Industrial Average hitting record levels in the process. Dubbed the Trump Trade, heading into 2017 it seemed all one had to do was buy US equities and then sit back and watch the dollars pile in.

However, it seems only 10 days into his presidency, Trump has given long equites traders some pause for thought with his executive order banning entry to the US from 7 majority Muslim nations.


eMini S&P Price Action January 2017
eMini S&P Price Action January 2017


From the above chart, we can see just how much markets have priced in the impact of fiscal stimulus under the Trump regime with the S&P rising over 100 points since November 8 2016. However, this has all been based on the assumption that the President should be taken seriously, but not literally.

However there is growing concern that this could only be the beginning of a more isolationist approach to policy.

So far the majority of the impact seems to be limited to business with exposure to the effected countries, or large migrant workforces – airlines and technology being the so far the worst affected. Monday saw shares in Alphabet Inc trading lower by 2.48% and American Airlines down 5.64%.

But there is still a large question as to where markets go from here. As the recent moves suggest that any increase in isolationism could undo the perceived benefits of decreased regulation and fiscal spending.

Equities markets still have some way to fall before the Trump Trade can technically be called done, but it does seem like reality is now beginning to check the rampant euphoria of post-election markets.  With the S&P seemingly happy to range and await further direction from the Commander In Chief.