Markets Enjoying ‘Trump-Effect’
Last week, the UK’s trio of positive data releases concluded on a bright note when the NIESR GDP Estimate came in higher than previous figures, roundly indicating continued growth. With no data releases today, Tuesday’s series of reports put inflation in focus as consumer and producer prices are seen.
Japan’s Prime Minister Shinzo Abe and US President Donald Trump established an image of a bromance to each’s and the market’s benefit at the weekend. Trump’s positive effect on global markets is next tested when his economic plans are revealed on February 28 at his first State of the Union address to Congress. This week’s key economic event is the Federal Reserve Bank Chairwoman Janet Yellen’s testimony before the Senate banking committee on Tuesday and Wednesday.
Pound Sterling – UK Markets
The Pound enjoyed a boost on Friday’s stronger than anticipated manufacturing data showing the economy maintaining a more balanced growth without relying too heavily on the British consumer. Economists predict that for the first time since 2011 expansion in manufacturing will surpass UK services, which are being trimmed by rising inflation. Manufacturing is, in turn, benefitting from the weaker pound. Today, the Bank of England gave a thumbs up to news that the Co-Operative bank is putting itself up for sale, noting Co-Operative made ‘progress in building greater financial resilience’ since being rescued 4 years ago.
The pound rose to a one-month high against the US dollar on news that Prime Minister Theresa May had won the vote in the UK Parliament to trigger Article 50. It’s expected that Sterling will continue edging higher against the euro this week. Last week the Scottish parliament voted for a symbolic motion rejecting the UK government’s anticipated decision to trigger Article 50. The European commission reasserted that Scotland wouldn’t have an automatic right to be part of EU if it voted to leave the UK. It would have to apply and would be given a timeline for adopting the euro.
US Dollar – US Markets
The success of Trump and Abe’s weekend meeting gave a boost to the global stock markets that’s termed ‘the Trump effect’. The president’s softening rhetoric regarding currency manipulation, now calling simply for ‘a level playing field’, was positive for Asian markets. The new-found sense of stability may have cleared the path for an increase in interest rates, which is the week’s primary focus. Watch the dollar strengthen further if Fed chair Janet Yellen’s comments indicate there’s enough confidence to raise the rates in near future. Likewise, expect a dent in the dollar’s value if the Fed expresses hesitation.
The US dollar continues to outperform the Japanese yen which is sliding on dismal date releases from Japan. Trump’s meeting with the Japanese Prime Minister marked his first working relationship with a trade partner whose combined goods and services account for nearly a third of the global economy. In 2015, the countries traded nearly $268 billion, and Japan’s trade surplus with the US was at $69 billion last year. Trump began criticising Japan’s trade policies in the 1980s, and recently threatened Japan’s biggest auto maker Toyota with a ‘big border tax’ if they built a new plant in Mexico. Japan’s Trade Minister, Hiroshige Seko swiftly responded, saying Japanese auto companies contribute 1.5 US jobs. On Friday, Abe said ‘a whooping majority’ of Japanese cars in the US are made by American workers.
Euro – European Markets
The euro dropped to a 3-week low against the dollar following Trump’s promise to present a ‘phenomenal’ tax plan. Concerns rising about the French elections are amongst the pressures that will keep the euro on a lower footing with the dollar in the near future.
Greece remains the focus of investor concerns this week as the European Commission urges a quick agreement on its next bailout payment. An urgent Brussels meeting on Friday between Greece’s finance minister Euclid Tsakalotos and EU creditors managed to defer what the International Monetary Fund termed an ‘explosive’ economic crisis. Greece’s borrowing costs fell on the news, with two-year Greek government bond yields down to 8.8% after seven-month highs of over 10% earlier in the week. The EU is anxious to stave off Grexit jitters and the February 20 meeting of Eurozone finance ministers, is the last one ahead of EU elections. Greece hopes the European Central Bank will agree to include Greece in its bond buying, quantative easing program as a vote of confidence in the country’s chances of economic recovery. Greece faces a bill of about €1.4 billion in April followed by €4.1 billion in July.
Other Currencies – Highlights
Japan’s Prime Minister Shinzo Abe was the first foreign leader to meet the new US president-elect. After last November’s surprise election results, Abe immediately visited Trump, giving him a gold-plated golf club. The next present promised is a lavish plan to add 700,000 new jobs in a massive upgrading of US infrastructure. Some of the funding comes in a loan from Japan’s ¥135 trillion public-pension fund, which is one of the world’s largest. In return for his largess, Abe has Trump’s commitment to provide military protection, which is particularly important in the East China Sea Senkaku islands, which China claims. US and Chinese military planes had a recent ‘unsafe’ military encounter over the South China sea.
Ahead of Abe’s visit, Trump softened his hard-line anti-China rhetoric with a ‘cordial’ call with Chinese President Xi Jinping. In their first phone call, the leaders of the world’s 2 largest economies agreed to ‘strengthen mutually beneficial cooperation in trade and economy, investment as well as international affairs.’ Asia is anxious to strike bilateral trade deals since Trump rubbished the US participating in the Trans Pacific Partnership, a 12-country trade deal that would have covered 40% of the global economy. Trump’s response to North Korea’s first ballistic missile test during his presidency, on Sunday was noticeably muted. The unscheduled event on Sunday will likely prompt the US to increase pressure on China, one of North Korea’s only trading partners, to impose economic sanctions.