Scotland Puts the Brakes on Brexit
Although parliament has cleared Prime Minister (PM) Theresa May’s path for triggering Article 50, the PM’s previous intention to do so today has been postponed until later this month. Before beginning the Brexit process, the government will likely try to prevent First Minister Nicola Sturgeon’s push for a second Scottish referendum. Sterling has plummeted to an 8-week low against the US dollar in reaction to the unpredicted political turmoil ahead of Brexit. Also, the anticipated future Bank of England (BoE) Governor Charlotte Hogg resigned after the Treasury Committee ruled she lacks the competence to be deputy governor.
The US Federal Reserve’s 2-day policy meeting begins today as the Fed is expected to raise interest rates tomorrow signalling a return to normalised monetary policy almost a decade after the financial crisis.
Pound Sterling – UK Markets
The pound has been decimated by parliament’s decision to pass the Brexit bill without the pair of amendments the House of Lords had added. The House of Commons chose to pass the bill without the assurance of residency rights for EU nationals or a guarantee that MPs will be able to vote on the final Brexit deal. Yesterday, First Minister Nicola Sturgeon said she’ll ask the Scottish parliament to vote next week for a second independence referendum in 2018 or 2019. Sturgeon complained that Scotland hasn’t been included in the decision-making process and wants to steer the country towards its best economic future, which she sees as independence. Although polls show most Scots still don’t want a second referendum, the country voted to remain in the European Union by 63%. The UK government wants a show of unity before beginning 2 years of Brexit negotiation. The risk of the United Kingdom breaking apart is a liability ahead of a highly-complicated deal making as the UK heads for a hard Brexit. Separately, BoE deputy governor Charlotte Hogg’s failure to disclose a potential conflict of interest has proved costly to her career. She’d told MPs last month that she had disclosed her brother’s position at Barclays when she joined BoE in 2013 and 2 days later admitted she hadn’t. She’d helped draft the bank’s code of conduct which she hadn’t followed herself.
Fitch’s Global Head of Sovereign Ratings, James McCormack has outlined 5 of the major challenges of Brexit. These include not being able to control the agenda which EU leaders can use to leverage their priorities including forcing the UK to pay exit fees before negotiations can begin. Theresa May has promised she’ll fight paying the hefty £50bn exit fee, which has been dismissed by critics as ‘a ransom payment’. She faces domestic disapproval if she capitulates, while not paying it gives the UK less of the 2-year allotment to strike trade deals. The Confederation of British Industry’s director general Carolyn Fairbairn said the UK should be ‘open minded’ about paying obligations noting that exiting without a deal ‘could lead to really significant chaos’ for UK’s economy. An Office of National Statistics release yesterday underscored this point by showing that 44% of UK total exports in 2015 were sold to the EU and only 9% went to Commonwealth countries.
US Dollar – US Markets.
The dollar has stalled after robustly climbing on the certainty of an interest rate hike by 25 basis points tomorrow. It isn’t likely to rise more when the rate is announced because the focus is already ahead toward whether or not the Fed is prepared to make another 3 hikes this year. According to the Congressional Budget Office, President Trump’s plan to replace President Obama’s healthcare bill will leave 24 million more Americans without insurance by 2026 than Obama’s Affordable Care Act would have. This would bring the total number of uninsured to 52 million. Defenders of the Republican’s care plan, known as A Better Way say it’s more affordable, and would lower the deficit by $337 billion. Experts say that premiums will be much higher for both older persons and lower income earners and the cuts to Planned Parenthood could increase the birth rate among the lowest income earners.
Today’s data release includes a look at February’s inflation rate when the Producer Price Index is released. It’s expected to have risen from January’s 1.6% to the targeted 2% that’s seen as an indicator of a strong economy. The steady increase in fuel prices and rents which is a boon to the marketplace is difficult for pensioners and others on fixed incomes. The ‘Trump rally’ effect of record-high trading that President Trump has had on the US stock markets is seen as worrying by Nobel Prize-winning economist Robert Shiller. He previously predicted both the dot-com bubble bursting and global financial crisis. Warning of a crash, he says ‘the market is way over-priced’ and notices traders are exclusively fixated on Trump being a ‘Great Leader’ from an American economic perspective without factoring in the myriad risks. The VIX index, measuring investors’ anxiety in the US stock market, has dropped by 30%.
Euro – European Markets
The euro isn’t strengthening after it made gains following European Central Bank President Mario Draghi’s indication that the bank could raise interest rates before the end of its quantitative easing programme. Yesterday, Draghi sidestepped any further mention of this, which had a softening effect on the single market currency. The major event for the euro this week is the Netherlands’ elections tomorrow. The escalating political row between Turkey and Holland is boosting support for both far-right nationalist Geert Wilders and Dutch Prime Minister Mark Rutte.
Germany’s ZEW economic survey shows that political risks arising from European elections are the cause of a ‘relatively high level’ of uncertainty in the German economy. March’s economic sentiment was 12.8 which was less than the 13.1 expected reading. Likewise, the barometer of March’s current situation was 77.3 lower than the anticipated 78.0. Other data out from the Eurozone is uniformly flat and moderately disappointing with Spain’s consumer prices remaining the same. Overall, European industrial production for January slumped to 0.9% and missed the expected 2.0% figure. The year-on-year factory output rate for January was down to 0.6% from an anticipated 0.9%.
Other Currencies – Highlights
Yesterday, the Japanese yen slipped against the US dollar, first on the expectation that the US Federal Reserve will raise the interest rate this Wednesday. Second, the release of data that raised red flags about the ability of Japan’s economy to sustain its recent recovery. The yen began sliding 10 minutes before figures showed January’s unexpectedly weakened machine orders. Orders were down by 3.2% from December and 8.2% for the year, showing the lowest level of demand for Japanese machinery in five months. Machine orders are an important indicator of future capital spending which is what must steadily increase in order to drive growth. Japanese policy makers are somewhat worried, noting the fall may be due to machinery orders’ characteristic pattern of fluctuation, as evidenced by December’s core orders rising by 2.1%.
The decrease in capital spending may also be a hesitation based on concerns that the world’s third largest economy may face US protectionist trade policies. US president Donald Trump and Japanese Prime Minister Shinzo Abe have yet to reveal any of the specific bilateral trade agreements they agreed to initiate when they met last month. In absence of more concrete information, the Bank of Japan will likely keep interest rates at -0.1%. Japan’s boldly planning to send its largest warship into the South China Sea in its first such show of military might since WWII. The Izumo leaves in May to train with the US Navy in the disputed territorial South China Sea through which around $5 trillion of global trade passes each year.