UK: The exit process has finally begun
(Yann Quelenn, market analyst)
Since yesterday’s triggering of Article 50, the Footsie 100 has risen and is now trading 16% higher than pre-Brexit levels. While the Brexit vote last year triggered a sell-off, we believe that there will not be a hard Brexit. However, it is clear that negotiations will be tough with all members having to agree on the final deal, which means that the next two years will be a serious rollercoaster ride.
We believe that the pound will further appreciate this year. Losing 20% in the wake of the referendum vote, the weaker sterling has provided the UK with a strong exports boost. Strengthening of the pound is now very likely especially as Europe faces a veritable minefield with the upcoming French and German elections. Time to reload GBP.
Brazilian government caps spending
(Arnaud Masset, market analyst)
In spite of rising global uncertainty, emerging market currencies have been rather resilient over the last couple of weeks. However, one has to acknowledge that volatility also increased temporarily as investors preferred to remain cautious in the event that Donal Trump had to face another setback in implementing his programme. After completely erasing losses from last November and returning to around 3.05 in February, the Brazilian real has been trading in a volatile range since then, moving between 3.06 and 3.20 as investors await further clarity on the US outlook to emerge.
It goes without saying that local developments in EM countries have been largely ignored recently - with the exception of the political turmoil in South Africa earlier this week - as market participants were too busy trying to anticipate Trump’s next move. A fresh batch of economic data from Brazil is due for release later today. January retail sales are expected to come in at -4.3%y/y (versus -4.9% in December) or +0.5%m/m (versus -2% in the previous month). The Brazilian economy is slowly gearing up as the central bank progressively eases its monetary policy. The Selic rate is currently at 12.25% but the market anticipates the benchmark rate to reach 9% by the end of the year as inflation is expected to return within the BCB’s target range of 4.5% +/-1.5%. All in all, looking at the hard data it seems as though Brazil is on the right track, however on the domestic side, the political situation is in complete upheaval and the uncertainty that stems from it should prevent the real from returning quickly towards its pre-recession levels. Moreover, the austerity measures planned by the government will further delay a speedy recovery. Nevertheless, it is a necessary evil to restore confidence and attract foreign investments. Short-term BRL gains cannot be ruled out as investors are still chasing returns and Brazil’s temporary stability is quite attractive.