Morning Report: 1 June 2018

1st June 2018 By: Ranko Berich

GBP. Sterling made gains against the dollar yesterday despite little in the way of data and market-moving headline news. UK politics remains focused on Brexit amidst stalling negotiations, with the independent reporting that left-wing supporters will tour Britain campaigning to convince Jeremy Corbyn to oppose the referendum result. This comes following a week of high profile companies publicly stating that they won’t invest in the UK until uncertainty over the logistics of leaving dissipates.

EUR. The euro was given a welcome boost yesterday evening, as Italian President Sergio Mattarella approved a list with Ministers for a new cabinet yesterday evening paving the way for a new Italian government to be sworn in later today. Markets had feared that Italy was being forced into new elections later in the summer, where the risk of an anti-European Union government being voted in would have been stark. Given Italy’s precarious debt situation, a move away from the EU- and implicit backstop of European Central Bank support that comes with it- would spook investors, who still have Greek debt drama of recent years still fresh in the mind. However, gains for the euro were stemmed by further political turmoil in Spain, who may well be without a government by the end of the day. The vote of no confidence against Prime Minister Mariano Rajoy later today seems to have gathered enough support to oust him. This would result in Pedro Sanchez, the leader of the socialist PSOE party, to become the new prime minister. The PSOE however only have 84 out of 350 seats in the Spanish Parliament, making the implementation of new policies dependent on the support of a broad collection of smaller opposition parties which hold widely varying views. Amidst this wave of political uncertainty, the Trump administration announced tariffs on steel and aluminium for imports from the European Union. Hopes that the US president would sign a waiver for what is deemed one of the main allies of the US, proved to be in vain. This morning sees Final Manufacturing Purchasing Manager Indices for several Eurozone countries, culminating into a reading for the entire block coming out at 9:00 BST.

USD. The greenback found itself in harm’s way yesterday after the Trump administration announced steel and aluminium tariffs against US allies including the EU, Canada and Mexico, losing out against almost the entire G10. A wide array of sectors have risen the alarm on what impacts these tariffs will have on their industry and on the broader economy. S&P Global Platts calculated that steel prices in the US have risen 37% so far this year, while benchmark prices in the EU and South-East Asia rose 2% and 8% respectively. Higher input prices, for example, hurt the car and truck industry, which accounts for 27% of US steel demand. Also, the agricultural sector is concerned about retaliatory tariffs, with the Farmers For Free Trade group noting that this “opens the floodgates to billions in new tariffs on American agriculture”. On the data front, the Core Personal Consumption Expenditures were slightly firmer than forecasted in May with a growth of 0.2%, very much in line with the recent trend. Today at 13:30 BST US labour market data are published, with Non-Farm Employment Change, Unemployment and Average Hourly Earnings.

CAD. With oil remaining at lower levels than last week’s highs, the Canadian dollar sat at the bottom of the G10 currency board yesterday and lost against the weakened greenback. With the announcement of Steel and Aluminium tariffs yesterday from the White House on a number of economies, with Canada being one of them, the loonie reacted worse than the euro. Canada and Mexico announced almost immediately that they will be imposing tariffs on imports from the US on products such as pork, apples and toilet paper. With NAFTA uncertainty still remaining, and negative rhetoric coming out of all parties involved, further escalation of trade frictions may tarnish the loonie further.

UK news

  • Financial Times: US businesses express alarm as tariffs push up steel costs. US businesses have warned there is a risk of severe damage from the tariffs on steel and aluminium announced by the Trump administration on Thursday and the retaliatory measures launched by other countries.
  • Reuters: Spanish Prime Minister Rajoy to be voted out of office. Spain’s centre-right Prime Minister Mariano Rajoy was set to be voted out of office on Friday and replaced by a Socialist, in a no-confidence motion triggered by a long-running corruption trial involving members of his party.
  • Wall Street Journal: Italian Political Parties 5 Star and League Strike Deal on Coalition Government. Two large antiestablishment parties, the League and the 5 Star Movement, struck a deal Thursday on a coalition government, resolving a political crisis and putting a euroskeptic administration into power in the eurozone’s third-largest economy.