Morning Report: 26 June 2018

26th June 2018 By: Ranko Berich

GBP. Sterling rallied against the dollar but posted losses versus the euro yesterday. The movement came despite little data released and few positive UK headlines. Investors wait and see if Jonathan Haskel, the man to replace the Monetary Policy Committee’s hawk that is Ian McCafferty, will give any sign of his monetary policy stance when he speaks later today at the Official Monetary and Financial Institutions Forum in London at 10:30 BST. With the voting recently shifting to 6-3 in last week’s monetary policy meeting, the outlook for a rate hike this year may take a knock if one of the hawkish members is replaced by a dove.

EUR. Euro experienced again how it is to top the G10 currency board as the single currency advanced in a day that also saw a broad equity sell-off across various markets. The German Ifo Business climate scored poorly at the headlines, falling to 101.8 in June, though the details provide some base for positivity. The decline in the most important leading sub-index, the expectations index, finally halted. It should be noted that, when analysed by sector, the German Trade sector’s business expectations turned negative for the first time in 3 and a half years, showing the impact of growing uncertainty over trade. With little on the calendar today ahead of the EU summit on Thursday, investors will keep a close eye on how global trade tensions play out, with the EU and China singing from the same hymn sheet in retaliation to the US protectionist policies.

USD. The dollar traded mixed yesterday, with the euro and Japanese yen posting the biggest gains in a broad risk off day, whilst the greenback made ground against the commodity based G10 currencies. The possibilities of a trade war continue to mount with China’s President Xi Jinping stating “in our culture, we punch back” yesterday in regards to further trade restrictions threatened by the Trump administration. Little has yet to be imposed since the steel and aluminium tariffs, with the US 25% tariff on $38bn of the $50bn proposed coming into action on July 6th, but rhetoric and threats have continued to build. Equity markets took a hit globally yesterday, with the FTSE100 down 2.24% on the day, NASDAQ down 2.09%, whilst Asian markets have opened on the back foot today. The risk off move filtered into US fixed income markets too with the spread between the 2 and 10 year Treasury yields reaching a fresh year-to-date low as investors piled into the later tenor security to protect against growing risk, pushing the back end of the curve down.

CAD. The loonie suffered throughout the day as trade tensions do not appear to abide any time soon, WTI crude oil prices decreased slightly and a wave of general risk off sentiment rolled over markets worldwide. Meanwhile, the chance for a July rate hike by the Bank of Canada stabilised just above 50%, coming down from 80% earlier, now Friday’s poor data and persisting trade tensions cloud the outlook for the Canadian economy.

UK news

  • Financial Times: BMW warns Brexit could force UK plant closures. BMW will be forced to close its UK plants if the company cannot quickly and reliably import components from mainland Europe after Britain leaves the EU, one of the German carmaker’s senior directors has warned.
  • Wall Street Journal: Trade Rift Within Trump Administration Sends Stocks on Wild Ride. Bitter fights over trade within the Trump administration again broke into the open, driving wild swings in the stock market as the White House’s top trade adviser clashed with the Treasury secretary over restrictions on foreign investment.
  • Reuters: Brexit halves new investment in British car industry, auto industry lobby says. Uncertainty over Brexit has halved new investment in the British car industry as Prime Minister Theresa May’s government current plans for trade after Britain leaves the EU are unrealistic, the biggest car manufacturing lobby said on Tuesday.