Morning Report: 23 August 2017

23rd August 2017 By: Ranko Berich

GBP Sterling is damned if Theresa May does compromise on Brexit negotiations, and damned if she doesn’t, if the last 24 hours of price action is anything to go by. News emerged yesterday that May’s Government is willing to concede EU officials and judges could play a role in settling disputes, a direct walking back of statements May has made in high profile speeches in the past. More details on the position will be available in a paper published today. Even though sterling has taken heavy losses over the last 24 hours, the news should not be construed as an unalloyed negative for the pound – if it signals a series of concessions from May that lead to rapid progress in talks. Yesterday’s data included a good print for the CBI Industrial Order Expectations Index, as the industry group reported “robust demand” for UK manufacturers.

EUR The euro was a major beneficiary of yesterday’s sterling weakness, but softened to the US dollar. The ZEW Economic Sentiment survey was released, and showed a fall in confidence among the surveyed analysts and institutional investors compared to last month, both in Germany and across the eurozone. The widely followed German Economic Sentiment index was at 10.00, below the long term average of 23.8 and lower than last month by seven points. The survey did note that respondents opinions of the current state of the eurozone as a whole climbed significantly, consistent with other output specific survey data. Throughout the morning more survey data has been released in the form of Services and Manufacturing Purchasing Managers Indices, which showed 57.4 and 54.9 respectively, a slight miss for services and the same result for manufacturing than in June, when it reached several year’s highs. Mario Draghi also gave a speech in Germany, although with the ECB President due to deliver another important address on Friday to the Federal Reserve’s Jackson Hole Symposium today’s remarks avoided market-moving topics.

USD USD climbed higher yesterday, with no direct event or news driven cause immediately apparently, aside from the looming Federal Reserve Symposium at Jackson Hole, which starts tomorrow. The Richmond Manufacturing Index, a survey based output measure done by the Richmond Fed, was unchanged in August, while the House Price Index rose by less than expected. Today at 14:30 BST Flash Manufacturing and Services Purchasing Managers Indices will be released, and at 14:05 the Fed’s Robert Kaplan will give a speech. New Home Sales will be released at 15:00.

CAD The loonie weakened marginally overnight, after Donald Trump made comments in a campaign rally that his administration will “end up probably terminating NAFTA at some point”. The fact we saw only minor CAD movement overnight despite the leader of the United States speaking against the crucial trade agreement can perhaps be explained by looking at past statements made by Trump that have since been walked back spectacularly. This list includes, but is not limited to, promises to build a border wall and make Mexico pay for it, cancel the Obama administration’s historic rapprochement with Cuba, repeal Obamacare, abandon NATO, appoint a Special Prosecutor to investigate Hillary Clinton, and move the US embassy in Israel to Jerusalem. In the meantime monthly Retail Sales expanded rapidly in June, once volatile items such as automobiles were excluded. Today at 15:30 BST North American Crude Oil Inventories data will be released.

UK news

  • FT: Britain softens Brexit stance on EU court. UK takes ‘constructive’ position on ECJ and dispute resolution for trade and divorce deals. Britain will soften its stance on new legal rules for Brexit on Wednesday, insisting only on ending the “direct jurisdiction” of the European Court of Justice after Brexit while accepting that EU judges or officials could play a role in settling disputes. David Davis, Brexit secretary, will publish a paper looking at different options for settling disputes between the EU and Britain, which could include courts or panels with representatives from both sides. A dispute resolution mechanism is key to Brexit, since it would be needed both to police the “divorce deal” and to settle arguments that arise if Britain and the EU agree a comprehensive free trade agreement.
  • Reuters: Britain posts first July budget surplus in 15 years, outlook darker. Britain unexpectedly posted its first budget surplus for any July since 2002 according to official data on Tuesday, welcome news for finance minister Philip Hammond in what still looks likely to be a difficult financial year for the government. The surplus in July stood at 184 million pounds, compared with last year’s 308 million pound deficit, the Office for National Statistics said, citing figures that exclude state-controlled banks. The surplus was boosted by a 10.6-percent year-on-year rise in self-assessed income tax receipts from individuals in July, a month that often sees a spike in these returns.