European Parliament Debates Brexit Bill
Sterling is up again after today’s UK Services PMI show a surprising rebound in the March services sector as business growth rose to a 3-month high. This sector accounts for three-quarters of the UK economy, and had dropped to a 5-month low in February. Today’s focus is on the European Parliament’s vote on the terms for Brexit.
The US dollar and the Japanese yen are both stronger after North Korea’s provocative missile launch with the expectation that the US and China will take action. Tomorrow’s meeting between President Donald Trump and President Xi Jinping has global markets tensely awaiting a change of direction on both trade and defence.
Pound Sterling – UK Markets
Today’s Markit Services PMI surpassed expectations and was very welcome data release after the Construction PMI came in at less than expected levels. While it’s positive, it can’t erase the fact that, with manufacturing down to a 4-month low in March, the UK is clearly already feeling Brexit’s pinch. Economists anticipate UK growth of 0.4% for this year’s first quarter, compared to 0.7% for last year’s fourth quarter. Also, Brexit-related concerns were raised at home and in Europe. A parliamentary committee said that Prime Minister Theresa May needs to demonstrate how ‘no deal is better than a bad deal’ by producing an economic projection that demonstrates precisely how leaving the EU with no agreement would affect the economy. The Bank of England warns that household debt is high as Britons are increasingly running up credit card and other personal debt.
In an indication that Sterling is becoming less sensitive to Brexit projections, it didn’t drop sharply on a warning from a close ally of German chancellor Angela Merkel that the City’s financial sector was at risk of losing around 100,000 fintech jobs. Manfred Weber, leader of the largest political group in the European Union said that after Brexit London will no longer be permitted to clear the roughly three-quarters of all euro-denominated trade it now does. A report by accountant firm Ernst & Young says that losing this economic sector would send a negative ripple effect across the UK that could affect up to 232,000 jobs. Today, among the topics being debated by the European Parliament is the matter of the unpopular Brexit bill, which a majority of Britons oppose paying.
US Dollar – US Markets
The US dollar hasn’t been helped by any of President Trump’s recent political manoeuvres. His decision to donate his first quarter salary of $78,000 to the US National Park Service was called ‘a publicity stunt’ by wildlife charity the Sierra Club. The money won’t cover even 1% of its intended purpose of improving historic battle fields. They require $229 million for necessary maintenance. Also, Trump’s budget blueprint called for making a drastic 11.7% budget cut, which amounts to a loss of $1.5 billion for the Department of the Interior which oversees the National Park Service. In other presidential news, as American taxes are due, they’re wondering how Trump’s promised tax plan will help them. Canada’s finance minister warned New York business leaders that Trump’s proposed border taxes would economically hurt Americans more than Canadians.
The US trade gap fell to $43.6 billion in February, which was the lowest level in 4 months. This came as a surprise since January’s deficit leapt up to $48.2 billion. Exports increased by 0.2% for February, with the highest levels of cars and auto parts being sent out since July 2014. The US’s deficit with Japan dropped by $600 million to a total of $4.9 billion. But the gap with China grew by $1.6 billion, rising to a massive $31.7 billion. This will be only one of the elephants in the room when President Trump meets with President Xi Jinping tomorrow. Jinping might point out that China is now the biggest US oil buyer. However, North Korea’s missile test today might raise building a mutually agreed defence strategy to a priority level.
Euro – European Markets
In yesterday’s French presidential debate, frontrunner Emmanuel Macron and Francois Fillon strongly attacked Marine Le Pen, accusing her of repeating the same ‘lies’ her father has used ‘for 40 years’. In a snap poll rating the candidates’ debate performance, viewers favoured Jean-Luc Melenchon followed by Macron, then Fillon, with Le Pen the 4th most popular of the 11 candidates debating. Le Pen is expected to do well in the first-round vote in 19 days, but unlikely to win on May 7. European Central Bank president Mario Draghi issued a new €50 note which he said would be harder to counterfeit. He also took the opportunity to point out that, although electronic payments are increasingly popular, three-quarters of all Point-of-Sale payments (these include shops, restaurants and payment machines) are made with cash.
The strong euro wasn’t driven any higher by today’s outstanding EU Service Sector PMIs which show the eurozone’s growth at nearly a 6-year high. GDP rose by 0.6%, led largely by the strength of growth in Germany and France for the first quarter of the year. France’s private sector growth was the best seen in 70 months.
Other Currencies – Highlights
The Japanese yen is said to be ‘unsustainably high’ to the US dollar exchange, according to a Morgan Stanley analyst. Weakening the yen is exactly what the Bank of Japan would hope to do since the currency has strengthened on jitters about the US President’s economic policy plans. Since the yen is considered a safe-haven currency, a stronger dollar will help the yen slip down to levels that help exports. One of the reasons Japanese Prime Minister Shinzo Abe was quick to show his support for President Trump is that the worst thing that can happen to Japan’s exports is that Trump’s policies fail. It had been clear that Abe feared Trump would be overly protectionist, which would be a second blow to export-reliant Japan. After North Korea’s recent missile launch, the yen grew stronger on the expectation that the US and China will take defensive action against Kim Jong-un’s government.
The Bank of Japan’s (BoJ) Tankan index, the primary gauge for large manufacturing firms, showed an 18-month high in March business conditions. This is an indication that Japan’s industrial sector has confidence that the yen will stay low enough to increase exports and kick-start a new pull out of years of deflation. With inflation currently near zero, it’s hoped that prices will start rising. The recent decrease to 2.8% in unemployment, with service sector growth hitting a 19-month high, means that more jobs were created in March. The BoJ hopes that the demand for workers will push up wages which could increase consumer spending and finally help lift prices.