Pound slips to 6-month lows: Morning Note
BoJo sees pound lose mojo , Aussie soft on RBA, equities steady ahead of Fed, Middle East tensions.
Equities steady before Fed
Equities remain cautious ahead of the start of the Federal
Reserve meeting today. The S&P 500 and the Dow were pretty well flat
yesterday, whilst the FTSE 100 notched a slight gain. Asia has been
mixed. Futures indicate European equities are trading on the flatline again.
Equities are lacking direction and will wait for the Fed to get a steer.
Equities investors are
likely to display caution with the Fed in view. They may be disappointed with
what the Fed offers – realization of this may manifest in mild selling ahead of
the meet. We’ve got no signs of progress on trade and little sense the
G20 will produce anything. And now we have building tensions in the Middle
The White House has
ordered 1,000 US troops to the region, with fears of escalation
rising. Tehran says it will breach uranium stockpile limits in days. The
Iran nuclear deal looks dead. Markets may start pricing in risk of escalation.
Whilst this is only a very small number of additional manpower, and is clearly designed to act as a warning to Tehran,
troop build-ups only tend to lead in one direction.
Pound lacks mojo
The pound is at its lowest in almost 6 months on heightened
fears of a no-deal exit. Boris Johnson is the clear favourite to become the
next PM – in fact it rather looks like he’s going to walk it. Currency markets
display fear that he has said he is prepared to take Britain out on October 31st without
a deal if needs be. More BoJo, less mojo. Whilst a crowded trade there is real slippage here with
little to spark life into the pound.
The calculus is simple – failure to take Britain out of the
EU this year risks a General Election and wipe out at the polls at the hands of
the Brexit Party, potentially handing Jeremy Corbyn the keys to Number 10. The
EU says it won’t renegotiate (it may have to), MPs won’t accept the existing
deal, and Parliament has limited scope to stop this train.
Sterling is increasingly reflecting the no-deal risk. Cable
was last hovering close to its lowest of the year at 1.2530, having dipped as
low as 1.2510, its weakest since the start of January. 2018 lows around 1.2470
could be the next target on the downside. BoE this week may signal tightening
bias and readiness to hike earlier than previously expected, but the pressure
on the pound remains because of Brexit. The BoE should be minded to remain on the sidelines until Brexit is decided.
Australia’s dollar is also soft and susceptible to a major
downside breach after minutes from the last RBA meeting showed more cuts are
coming. More likely than not we should get at least one more cut this year.
The minutes said: ‘Given the amount of spare capacity in
the labour market and the economy more broadly, members agreed that it was more
likely than not that a further easing in monetary policy would be appropriate
in the period ahead.’ This was extremely strong signal and suggests more cuts
to come and soon. Excluding the Jan flash crash we are now testing multi-year
lows, on the cusp of a move back to decade lows not seen since the height of
the financial crisis. At 0.6830 the AUD/USD cross was testing major support – this
could hold until we get further clarity from RBA governor Lowe on Thursday.
Oil soft, gold up
Oil has failed to catch any tailwinds from the Middle East
tensions. Brent was below $61 again but remains clear of last week’s lows.
WTI was holding $52. All looking very bearish and flaggy right now. Until we
get a good dose of economic data this rut seems set to continue.
Gold keeps cranking higher
– the prospect of lower US yields and geopolitical tensions seem to be acting
as a tailwind. Last at $1346 the big target for bulls is the 2018 peaks at
$1365 and then the 2017 highs at $1375.
FY numbers are positive, with EBITDA at £2.11bn, a slight beat as revenues rose
19%. The medium term outlook looks confident. Despite fears of slowing growth
in the US, management say they expect to continue to experience strong end
markets in North America.
On tap (GMT)
EUR – ECB President Draghi Speaks (08:00)
EUR – German ZEW Economic Sentiment (09:00)
EUR – CPI (09:00)
USD – Building Permits (12:30)
GBP – BoE Gov Carney Speaks (14:00)
EUR – ECB President Draghi Speaks (14:00)