It has been a quiet day so far for financial markets, UK and European stocks are trading in tight ranges and the US futures market is predicting a fairly nonchalant open later today.
Purchasing manager surveys in Europe were mostly in line, showing slightly weaker manufacturing activity in Germany, but stronger services sector data across the currency bloc. Not even decent CBI retail sales data for August could spur the pound, which has turned lower after failing to sustain gains back above 1.29. It could be a fairly quiet afternoon as the market awaits tomorrow’s Jackson Hole conference, with Fed chair Jerome Powell speaking at 15:00 BST.
Markets put money on no-deal Brexit
The pound’s reaction is worth noting. Earlier today the British government posted papers advising British businesses on how to react in the event of a 'no deal' Brexit where Britain has to go back to using World Trade Organisation rules. Overall, the Brexit secretary said it was very likely that the UK would leave the EU with a trade deal with the currency bloc, however the market seems to have doubts.
The advice published by the government, on everything from car exports to imports of Danish sperm, appear to be worryingly thorough, almost as if they are predicting a no-deal scenario.
The government is also advising UK business that trade with the EU to buy software, invest in warehousing and customs processing and to consider re-negotiating commercial terms now. Interestingly, the best-performing sector today in the FTSE 100 is the IT sector, up nearly 1%, with software and services up some 1.02%. The market is not taking any chances, the next big defensive sector to invest in the UK could be companies that can help corporate Britain to navigate through a no-deal Brexit.
Why do sterling rallies fail?
The problem for the pound is that momentum is to the downside. This usually means that rallies in sterling tend to fail, as we have seen today. We believe that the short term bias for GBP is lower, especially if the Fed’s Jerome Powell is relatively hawkish during his speech at Jackson Hole on Friday, as some expect. Thus, a move back towards $1.2800 seems likely in the coming days, even though CBI UK reported retail sales data defied expectations of a slump and maintained a respectable 29, up from July’s 20 level.
The Rand gets the Trump treatment
Donald Trump’s Twitter account is also moving markets again. The rand is the worst performing currency in the emerging markets space, after President Trump waded into the debate about seizure of land from white South African farmers, which is part of the ANC’s policy of expropriation of land without compensation.
The rand is down some 0.3% on the back of the comments. If Trump uses sanctions against South Africa to try and force the SA government to change its policy towards the white farmers, then we could see the rand experience the same tumultuous decline as the Turkish lira, which is down some 50% since the US started to impose sanctions on President Erdogan’s government.
The South African rand is vulnerable, not only to the imposition of sanctions, in particular any threat to the South Africa’s access to the African Growth & Opportunity Act, which grants many of its products duty-free access to the US, but also to higher US interest rates. Thus, it could be a double-whammy of bad news for South Africa this week if Fed chair Powell maintains a hawkish bias at Jackson Hole next week.
Is a Trump impeachment a real threat to markets?
The President also recorded a video on Twitter late on Wednesday, where he said that he thought the stock market would crash if he was impeached. Is this a direct call to Wall Street to help fund Republicans in this November’s mid-terms? While the longest-ever rally in US stocks is far from Trump’s triumph alone, we do think that if the Democrats look like they could win Congress back from the Republicans in November then this could weigh on US markets as the Trump tax reform has, undoubtedly, been a contributor of the rise in US stocks this year.
Thus, as we move into the end of the week Trump’s tweeting is firmly in focus, and watch the performance of UK software companies, if their star continue to ascend then it may be time to consider a no-deal Brexit.
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