Perfect Storm passing
The three pillars that have been supporting sterling’s recent rally could be starting to crumble a little.
First the services data released last week could simply be a reaction to the bad weather the country saw in March. I could believe that more if it was manufacturing, but services? Hmmm. It could also, of course be the start of the drift of services business from the UK to Europe as a prelude to Brexit. The data showed activity falling towards the dreaded fifty level below which signifies contraction.
Next, the rate hike. Is it nailed on? I’m not so sure. Next week will be crucial as the employment report and inflation data are released. Although the MPC will have advance notice of the April data when it meets on May 10th, it is the Q1 data that will provide them with a guide. If headline CPI is 2.6% or even 2.7%, it will be hard to make the case that inflation hasn’t topped out making a rate hike somewhat redundant in the current environment. Even if the pace of wage rises is increasing a hike could choke off the consumer who will be faced with higher mortgage payments etc and be left as they have been over the past year or so with disposable income shrinking.
Finally, Brexit. Perhaps no news is simply now news and not the good news analysts are praying for.
There was a rush of expectation around the time the transition deal was announced over an agreement about the Irish border. It transpires that the only way there would have been an agreement would be if the UK has capitulated as it has over most other Brexit problems. This is different, any capitulation which 'hives off' Northern Ireland will meet immovable resistance from the DUP and will lead to a general election.
Deutsche Bank (DE:DBKGn) move a prelude to retrenchment?
Deutsche Bank, the largest German lender has announced that it has sacked its (British) Chief Executive. This may simply be a change of direction for the bank but it raises two important questions particularly since John Cryan had two years of his five year deal still to run; First is this in connection with the continuing bad loan portfolio of which German and French banks own a quarter or two hundred and fifty billion euros of, or is it the start of a retrenchment from Deutsche back into its own domestic market which will be bad for the eurozone economy and ultimately the euro.
This remains to be seen but it takes the gloss off the progress the euro has been making which now resembles a swan; all elegance and serenity above the water but frantic paddling below the surface.
Can Trump win a trade war?
Short answer; No!
In any case, what denotes a victory? Ultimately all that is happening is posturing primarily by the posturer in chief to get China around a table with the preliminary needling simply to establish where the fault lines occur. The U.S. is in the weaker position despite being the aggressor since unless Trump can make it economically viable for U.S. manufacturers to bring production home, America is going to be reliant on imported goods and it cannot pick and choose particularly with a nation that cannot be bullied or intimidated like China.
This whole issue will evaporate once China and the U.S. agree to meet and that cannot come soon enough for the Japanese who are seeing their currency strengthen as a direct result of the rise in risk aversion. That is contrary to the idea of Abeonomics and will cause major issues for Japanese exporters.