Sterling hit a two month high this week. The Pound closed at $1.2464 against the dollar and €1.1255 against the Euro. Much work will be required if strong overhead resistance at $1.25 is to be overcome in the near term.
Markets were encouraged by the prospects of a Brexit deal secured by a Prime Minister on serious charm offensive in the North of England during the week.
Johnson has picked up the Northern Powerhouse mantle, promising a train set fit for purpose and the prospects of a bridge to Northern Ireland. Once again a "Bridge Too Far", albeit secured at a fraction of the cost of HS2.
The latest news on the U.K. economy presented a mixed bag. Manufacturing fell in the latest figures to July. Construction growth disappointed, as service sector growth slowed. We expect the economy to grow by 1.2% year on year in the third quarter, following growth of 1.5% in the first half of the year.
The good news, unemployment continued to fall as modest growth continued. Fears of recession were pushed aside, despite the drop in the number of vacancies in the economy. The bright spot in the data was undoubtedly earnings. The genie is out of the bottle. Earnings increased by 4.2% in the month of July. Service sector earnings increased by 4.4%. Financial sector earnings were up by over 5% and construction pay rates increased by 7%.
The rate of growth in earnings will limit the capacity of the Bank of England to cut rates for the rest of the year. The Prime Minister is determined to detach the UK from the EU by the end of October. The pressure is on to secure a deal which is palatable within parliament and acceptable to the Tory election base with just thirty days available to secure sign off ...
A Trade War Fears Ease ...
Trump shocked close advisors this week. The President announced that Martians had landed at Camp David on Monday in a search for higher intelligence. A Presidential mind probe proved disappointing. The visitors left the following day, taking National Security Adviser John Bolton with them as a peace gesture to the rest of the world.
The President explained, "John had told me in the evening that he wanted to resign, I asked him to wait until morning and he was whisked away at dawn." "I know him very well. The problem with Bolton he just wanted to nuke people. I just want to write beautiful letters and invite the Taleban to barbecues at the ranch".
Peace is in the air. The President is anxious to get the troops out of Afghanistan and relocate them to his luxury resort at Turnberry at the earliest opportunity. Several exploratory visits have already been made with refueling contracts secured at Prestwick.
The President talks of a third term for the dynasty but really dreads a one term tag. Talks with the Taleban, sanctions eased with Tehran, a blind eye to missile launches in North Korea anything to secure the elusive Nobel peace prize.
The economy is slowing at home as government borrowing soared to over $1 trillion dollars in the first eleven months of the financial year. Fears of recession are growing as prices rise and manufacturing output and investment falls.
This week, the iconic U.S. tennis ball manufacturer Head Penn Sports Group complained about the indiscriminate nature of tariffs. U.S. owned Penn was established in 1910. Five years ago production was relocated to China. The company now faces a 15% tariff on imports. Penn's principal competitor is Wilson. The company is owned by a Chinese consortium which manufactures in Thailand. The Chinese owned Wilson escapes the punitive Trump tariff and secures a significant competitive advantage in the process. Neat.
Trump needs a deal with China to avoid a crushing defeat in the election next year. A delay to the next round of tariff hikes was announced this week as a gesture of "good will". Beijing responded by agreeing to suspend tariff actions on certain agricultural products including soybeans.
Markets responded pushing the S&P index above 3000. Ten year gilt yields rallied to 1.83%. Recession fears are overblown. John Bolton has left the Trump orbit. The hawks are losing traction. Peter Navarro, the great architect of Sinophobia, may be the next to leave the camp.
Trump needs a deal with China, the trade policy is no longer a vote winner as reality dawns on farmers and blue collar workers alike ...
ECB Cuts Rates ... Extends Bond Buying ...
In Europe, Mario Draghi announced a rate cut of 10 basis points. The deposit rate was cut by 0.1% to a level of -0.5%. The ECB will begin a €20 million per month bond buying programme in November.
Draghi warned the risks to growth are tilted to the downside. The ECB cut forecasts for EU growth this year from 1.2% to 1.1%.
Growth forecasts for 2020 have been reduced to 1.2% from 1.4%. It is not clear how pushing on a string in the face of adverse trade winds will help the process.
Euro markets closed higher. Ten year bond rates rallied to -0.45%. Almost $17 trillion dollars of bond stock, predominantly sovereign bonds in Japan and Europe, offer negative yield. Draghi has one more meeting before stepping down as President. Christine Lagarde has promised a review of policy on QE and negative rates upon taking office.
Not all are convinced about negative rate policy. Mass-selling German newspaper Das Bild on Friday accused European Central Bank President Mario Draghi of "sucking dry" the bank accounts of Germany's savers.
Trump was quick to criticize the move and the lack of response from the Fed ....
“European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports ,” he tweeted “The Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”
"It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’"
Boneheads at the Fed , Trump has discovered "accents" on his keyboard. In this way progress is made ...
That's all for this week, have a great weekend. We will be back with more news and updates next week!
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