31 May 2020

Market Brief: yesterday was about Jeremy, today it's about Jerome

Kiran Russell

Dealing team

Jeremy Corbyn’s decision to back a customs union between the UK and the EU yesterday has set up a parliamentary showdown for Prime Minister Theresa May. 

Today's data releases
  Key levels
09:00 BoE's Woods speaks 13:00 German CPI    
13:30 US durable goods orders   Support Resistance
13:30 Fed Powell's prepared testimony remarks possibly released GBP/USD 1.3857 1.4145
15:00 Fed Powell testifies to the House Financial Services Committee GBP/EUR 1.12568 1.1508
Market overview

Recall that Mrs May has ruled out any form of customs union with the EU after Brexit, believing that it will curtail Britain’s ability to broker new trade deals with nations outside of the bloc. She will also need to be wary of abandoning that stance as she will very likely risk alienating the hardcore Brexiters in her party, led by Jacob Rees-Mogg, who happens to be the bookies favourite to succeed her.

 

Labour’s announcement, which would keep trade with the EU tariff free in exchange for restrictions on the UK’s own trade policy was welcomed by the Confederation of British Industry. It also got a positive response from Brussels as it may solve the problem of how to avoid a hard border with Ireland.

 

Theresa May’s spokesman said she will hold a special meeting of her cabinet on Thursday ahead of her much anticipated Brexit speech on Friday. It is possible that Labour’s proposed customs union will be discussed, however May’s spokesman reiterated that the Government’s position on post-Brexit customs arrangements remain as set out last summer, so Theresa May might try well dig her heels in on this one.

 

In other news, US stocks rose to a three-week high and US home sales figures out yesterday were softer than expected. Look out for our Economists’ monthly ‘Global Economic Overview’ publication in your inboxes, which went out yesterday. On the currency front it’s worth noting that our Economists have now raised EURUSD forecasts to 1.3000 by the end of 2019, this is in spite of their call for four US rate hikes this year and two further hikes next year. Mario Draghi did his bit yesterday to support our Economist’s stronger long term euro view - he mentioned that growth is stronger than previously expected, whilst caveating that inflation has yet to show more convincing signs of a sustained upward adjustment.

 

Further afield, in South Africa, President Cyril Ramaphosa used a cabinet reshuffle to get rid of several allies of his predecessor Zuma and deepen a market-friendly shift in government. Nhlanhla Nene has made a dramatic return as South Africa’s finance minister – you may recall that Zuma’s sacking of Nene triggered a sharp sell-off in South African financial markets that ultimately saw credit rating agencies downgrade its sovereign debt to ‘junk’. Nene headed the treasury until late 2015, when Mr Zuma abruptly removed him over his resistance to expensive pet projects.  

 

The day ahead

Turning our attention to the day ahead - the New Fed Chair, Jerome Powell, testifies before the House Financial Services Committee. This will be Jerome Powell’s first major public comments since taking over the Fed Chair on 5th Feb. He is scheduled to discuss the Fed’s semi-annual monetary policy report and the state of the economy. Whilst he is not expected to rock the boat too much, markets will be looking for any signals that the central bank is leaning towards four rounds of tightening this year. Also today, we have US durable goods at 13.30 and closer to home we have BoE’s Woods speaking at 09.00 and German inflation figures at 13.00. Analysts will be keeping a close eye on this given Draghi’s comments and the big overshoot in inflation out of Spain this morning (1.7% vs. 0.9% consensus).

 

Thought of the day

Loo roll and Taiwan aren’t two things we often think about but they hit the headlines in recent days as shoppers out there have been panic buying. In Taiwan pictures of now empty shelves have filled social media as shoppers rushed to stock up before upcoming price rises. According to Taiwan's Ministry of Economic Affairs this price rise is a direct result of rising raw material costs globally and Manufactures are now looking to pass this on to Retailers and in the end, consumers. Loo roll shortages are something no one wants for obvious reasons and likewise no one wants to see panic from sudden price increases. In our world having certainty over FX rates and therefore costs or revenue streams in other currencies is something we can help you manage. To discuss your FX strategy and make sure your back (side) is covered, give your Investec Dealer a call today.

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