Sterling rebounds to decline
By Vincent-Frédéric Mivelaz
The pound rose by 0.77% following yesterday’s announcement of a Brexit deal, but there is a long road yet ahead to ratification. The 27 European Union member states will vote on Sunday 25 November: a yes is expected, even though Spain is threatening to veto over Gibraltar. Critically, the final word remains in the hand of the UK Parliament, which will take the final decision sometime thereafter. Accordingly, we expect GBP/USD to decline slightly, approaching the 1.2790 range. The Political Declaration, approved yesterday, remains a political, and not a legal-binding document, thus it does not engage either the UK or the EU to any engagement in the future. The document gives some hints towards the areas where both counterparts will have to work on following the divorce.
Soft outlook for commodities
By Peter Rosenstreich
Upbeat expectations in 2018 have given way to a nearly opposite forecast for 2019. 2018 saw a steady demand improvement, and commodity demand is tightly tied to global economic conditions. Global trade growth is around 50% slower on a 6-month moving average basis than a year ago. Chinese exports tagged with tariffs will become less competitive due to their significant import concentration. In addition, China’s domestic demand is slowing faster than expected. The growth slowdown is also hitting commodity users India, Argentina, Brazil and Turkey. Finally, the rising value of the USD and its inverse in many emerging economies will also support weakness in H1 2019.
Metal prices are weaker. Iron ore has held up surprisingly well considering the developing risk. China actually increased imports of high-quality iron ore, as Chinese steel mills were required to cut emissions. Chinese environmental regulations to cut pollution forced weakness in prices. China’s steel industry announced productions cuts to avoid accusations of dumping.
Italy wobbles
By Peter Rosenstreich
Europe is moving toward deeper unification, with or without the people behind it. Risk from a single nation is unlikely to derail the broader Europe. Despite objection from Brussels the Italian anti-establishment government plans to kick start growth with an ambitious fiscal stimulus that would widen the public deficit to 2.4% of GDP.
We discount the rising risk premium. First, we doubt the market cares about deficits, since bailouts are available (see Greece 2010). Second, although Italy’s Debt-to-GDP is a massive 170%, Italy is not leaving the safety of the EU. Outside of the well-publicized rising government debt, weak banking system and lack of competitiveness there are bright spots. Italy is running a trade surplus and most outstanding government debt is held domestically. Bond yields are well below Euro crisis peak levels and should further moderate. Moody’s downgraded Italy government debt while S&P left its rating at BBB, which allows the European Central Bank to continue to purchase government debt. We doubt Italy will create a situation that demands a bailout program or financial market disruption.
Markets mixed
By Vincent-Frédéric Mivelaz
Following a decline in shares due to weak corporate earnings and growth worries, European markets are opening in the green, supported by banks and technology sectors. At market opening, the UK FTSE 100 index (-9.15% year-to-date) is trading up 0.36%, Germany’s DAX and Spain’s IBEX 35 have risen 0.47% and 0.40% respectively, with the Euro STOXX 50 ahead by 0.38%. Asian shares are trading in the opposite direction, with Chinese shares declining amid worries of a growth slowdown and pessimism from analysts about improvement in equities and a breakthrough in the trade war at the G20 meeting. Both Hong Kong’s Hang Seng and the blue-chip CSI 300 ended the week at -0.35% and -2.21% respectively. Japan’s Nikkei and Australian ASX 200 closed at +0.65% and +0.44 respectively.