13 Nov 2017

Market Brief: pressure mounts for Theresa May

Shaun Garrett

Dealing team

Friday saw the release of Industrial Output for September. The results were positive having risen by 0.7% against a market consensus and Investec expectation of 0.3%.

Today's data releases
  Key levels
10:00 EU ECB Vice President Vitor Constancio speech   Support Resistance
16:45 US monthly budget statement GBP/USD 1.3030 1.3230
18:00 JP Bank of Japan Kuroda speech GBP/EUR 1.1070 1.1375
Market overview

Friday saw the release of Industrial Output data for September. The outturns were positive having risen by 0.7% against a market consensus and Investec expectation of 0.3%. The ONS’s provisional numbers also pointed to a 0.3% monthly rise. Manufacturing sector output was also stronger than the expected 0.3% m/m rise and the ONS’s implicit estimate (+0.5% m/m, within its GDP numbers), coming in at 0.7% (2.7% y/y). Note though that estimates of construction sector output for the same period came in much softer than the market expected with a 1.6% m/m decline. Overall, the ONS said the figures would have only a negligible impact on the +0.4% q/q preliminary Q3 GDP figures, although looking ahead to Q4, they do at least show the manufacturing sector to have ended Q3 on a solid note which bodes well for Q4. UK trade figures for September were published at the same time and showed the headline goods trade deficit narrowing to £11.3bn, from a £12.4bn deficit in August. This helped the Pound start on the front foot during Friday’s trading session. The rally would be short-lived following a report from The Times on Sunday.

The Pound lost ground this morning in early Asian trade, as reports were released that a group of conservative lawmakers had agreed to sign a letter of no-confidence in Theresa May. Rumours circulated in The Times that 40 MPs had agreed to sign the letter amid concerns about Mrs May’s leadership and handling of Brexit. Tory party rules are such that 48 MPs can trigger a leadership election. Reports after the sixth round of UK/EU negotiations suggest that talks have entered crisis mode, with a fading likelihood that they will be able to move onto the next phase (i.e. trade) by next month. Stories are also circulating that aides close to Mrs May are privately admitting that a trade deal might not be signed by the time Britain leaves the EU in March 2019. May’s opponents are now eight lawmakers short of what’s needed for a leadership challenge, the newspaper said, citing people with knowledge of the matter it didn’t identify. May is struggling to maintain her grip on power after the resignation of two cabinet ministers, mounting calls to sack Foreign Minister Boris Johnson and as the European Union raises the prospect of Brexit talks failing to reach a breakthrough by year-end.

Reports from Bloomberg suggest that the Euro area economy is heading towards a golden period. The turnaround is striking for a region that plunged from the global financial crisis into its own sovereign debt turmoil, record unemployment and near-deflation that threatened the very survival of the currency union. European Central Bank policy maker Benoit Coeure last week went as far as to say that in terms of balance and robustness, the economy is in the best shape since the euro’s birth in 1999. Consumer confidence is at its highest level since 2001, the QE programme has been reduced and EU growth forecasts have been raised 8 times this year. Taking this into consideration will we continue to see Euro momentum into 2018?

The day ahead

This week sees the delayed EU Withdrawal Bill finally enter committee stage (Tuesday/Wednesday), where it will likely be subjected to a significant amount of cross-party scrutiny during the first two of eight scheduled days of debate. So far, MPs have tabled almost 400 amendments across 140 pages to the legislation, which transposes EU law onto the UK statue books. But with political disagreements and distractions aplenty, it could be some time until it makes it through to report stage.

Those hoping for a reprieve on the data front are likely to be disappointed. UK Inflation kicks off proceedings on Tuesday, which our forecast suggests will show that the CPI measure remained steady at 3.0% in October. This could mean that BoE Governor Carney will be spared from having to write a letter to the Chancellor. Following that, we have labour market data on Wednesday which we expect will show no change to the unemployment rate at its 42-year low of 4.3%. We also continue to expect the figures to confirm sluggish wage growth. Finally, retail sales caps off the week on Thursday, which we expect to show that October has been another poor month for Britain’s high street.

Over in the Eurozone, the ‘flash’ estimate of Q3 GDP is due out on Tuesday, alongside September figures for industrial production. These are followed by final October inflation (HICP) data on Thursday. Across the Atlantic, Wednesday is set to be the key date for the US with CPI, retail sales and the Empire State manufacturing survey all due out at 13:30 London time. The back end of next week sees the release of industrial production, the Philadelphia Fed report as well as various indicators on the housing market, including existing home sales, starts and permits. Efforts to push through President Trump’s tax reform are also set to continue as both chambers begin to debate the bill. However with significant inter and intra-party divisions remaining, progress may be slow as further amendments are made in order to drum up enough political support. 

Thought of the day

Reports after the sixth round of UK/EU negotiations suggest that talks have entered crisis mode, with a fading likelihood that they will be able to move onto the next phase (i.e. trade) by next month. EU’s Chief negotiator Barneier, says he is planning for the possible collapse of Brexit negotiations with the UK. Furthermore, stories are also circulating that aides close to Mrs May are privately admitting that a trade deal might not be signed by the time Britain leaves the EU in March 2019. Aside from this PM May is facing further pressure from her own party as 40 Conservatives MPs are prepared to sign a letter of no confidence in her leadership. What does this mean for the Brexit process and what will post Brexit world look like? The Brexit clock is certainly ticking. 20,833 is the total number of laws affected by Brexit, are we in time to get an agreement on those? 359,953 number of financial services ‘passports’ are also at risk. The EU regulation to end mobile roaming fees will also be in trouble after Brexit. Enjoy the free EU roaming while it lasts. 14-15th December EU summit will be a key date for the Brexit negotiations. To hedge your FX exposure ahead of this, calling the Investec Dealing team today on 0800 055 6339.

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