FTSE finally falls
The binary relationship between the FTSE and the pound is still going strong but the price moves have finally reversed. The pound’s enduring drop and the corresponding record winning run in the FTSE has come to an end, for now.
Britain’s main equity index dropped over 1% back below 7300 while the pound put in one of its strongest one-day gains in decades. UK-listed multinationals including Burberry (LON:BRBY) which sells a lot of clothes overseas and miners like Anglo American (LON:AAL) which report in US dollars felt the pain of the resurgent British pound. The shares that could scrape together some gains were mostly comprised of companies which benefit from a stronger pound sterling.
Rolls Royce (LON:RR) was Tuesday’s biggest blue-chip gainer after it agreed to a £671 corruption settlement. British American Tobacco (LON:BATS) shares dropped after it confirmed it would buyout the 58% stake in Reynolds American Inc (NYSE:RAI) that it doesn’t already own.
‘Trumpflation’ trade looking deflated
While the most talked-about currency move of the day was the rise in the British pound, the move with the widest ranging market implications was the fall in the US dollar. The greenback slipped against every G-10 currency pair, helping commodities including oil and gold gain significant traction. The fall in the dollar saw a number of significant price levels give way in the forex market. EUR/USD touched 1.07 for the first time since December 8 whilst USD/JPY fell beneath 113 to a six-week low.
The US currency has been topping out in 2017 and Donald Trump’s comment that the dollar is already “too strong” was the final nail in the coffin. We noted on January 6 that
The December payrolls report hasn’t cast any major doubts over the chance of three rate hikes in the US this year.
At the same time, it probably hasn’t done enough to prevent the inevitable pullback in an over-extended US dollar which appears to have begun this week.
The “Trumpflation” trade has been looking especially deflated since The Donald’s first press conference as President-elect. There is significant execution-risk on the new administration’s policies, and that’s once we even know what they are. We believe this dollar correction has further to go.
Gains in multinationals like Apple (NASDAQ:AAPL), which benefit from a weaker dollar and Exxon (NYSE:XOM), which rose with the price of oil shielded the Dow Jones from any significant fallout. Well-received results from Morgan Stanley (NYSE:MS) weren’t enough to stop a rout in US banking names amid a clouded outlook for deregulation under Donald Trump. Meanwhile, the Trump-effect on the automotive industry was on display again after Hyundai announced it plans to boost investment in the US to $3.1bn over 5 years.
A “clean breakout” in GBP/USD
The British pound stormed higher on Tuesday in a massive short-covering rally. Theresa May’s hard Brexit speech was softened by the agreement to a parliamentary vote on the substance of any Brexit deal with the EU. The parliamentary vote will keep the more enthusiastic Brexit ministers in check. The vote is expected in early 2019, near the end of the two-year negotiating period.
The government deserves some applause for its expectations management. The leaking of key details from the speech meant much of it was priced in, teeing up Theresa for a relief rally as she stepped on stage. To her credit, Theresa May came across as strong advocate for Britain. EU leaders would do well not to underestimate May as an adversary over the negotiating table.
While the Prime Minister’s speech was the clear driving force, it was a day of numerous tailwinds for the British pound. Overnight Mark Carney pointed towards a more hawkish Bank of England. Resilient consumer spending means the BOE’s focus is shifting to controlling inflation. Indeed, data showed prices rose 1.6% y/y in December, a significant acceleration from the 1.2% y/y rise in November. On a side note, Apple raising prices in the App Store by 20% could be a sign of things to come for the British consumer in 2017.