02 Jul 2020
Market Brief: David Davis resigns
At Chequers on Friday, the Prime Minister appeared to have bound Cabinet opinion behind a negotiating package on the UK’s future relationship with the EU.
|Today's data releases||Key levels|
|08:50||UK BoE's Broadbent speaks|
|12:00||EZ ECB's Nowotny speaks||Support
|14:00||EZ ECB's Draghi speaks||GBP/USD||1.3657
|19:30||UK BoE's Tenreyro speaks||GBP/EUR||1.1186
Congratulations all on a great win for England this weekend! Dating back to 1979, England and Sweden have played 15 times with England having won only 2 of those games until the last match on Saturday. Now on to other news in the UK. At Chequers on Friday, the Prime Minister appeared to have bound Cabinet opinion behind a negotiating package on the UK’s future relationship with the EU. The framework itself, still to be presented to Brussels, would include a free trade zone in goods with the EU, including a common rulebook and a so-called Facilitated Customs Arrangement. Meanwhile, the UK would not be subject to the direct jurisdiction of the European Court of Justice (though would pay ‘due regard’ in cases relating to EU rules). It would also be able to control the level of immigration from the EU and would be able to negotiate trade deals with third party countries.
Despite appearances that PM May had won the unanimous backing of her Cabinet, David Davis resigned as Brexit secretary on Sunday with his junior ministers, Steve Baker and Suella Braverman, following him out the door. Mr Davis is set to speak on BBC Radio 4 at 8:10am today and LBC radio at 4:00pm. Speculation surrounding his successor is mounting, with both environment secretary Michael Gove and Cabinet Office minister David Lidington reportedly in the running to take up the Brexit mantle. An announcement on Mr Davis’ replacement is scheduled for 9:00am today. Later on, the Prime Minister is set to address the Commons on the government’s adopted strategy, with a White Paper expected to follow later on in week providing greater granularity. How Mrs May is received in the Commons remains to be seen. There are rumours that she may face a challenge to her leadership of the Conservative Party and indeed PM May is set to attend a 1922 Committee meeting this evening.
There has been little market reaction to Mr Davis’ resignation with GBPUSD managing to break above $1.33 this morning. Overall, though the government’s agreement on its negotiating stance is indeed a step forward, it is not an end in itself, bearing in mind the degree of negotiations still required. For instance, Westminster now has to negotiate with the other 27 EU countries and at this stage, it is not clear how far apart the two sides will be. Additionally, the government’s three page document was very short on detail on its negotiating position with regard to services, including the financial sector.
As expected the US introduced tariffs on USD 34bn of imports from China and China retaliated in kind. Overall, financial markets saw little shock in the news and reacted fairly well. Some estimates have suggested that these measures so far, may be enough to take 0.2/0.3% off Chinese GDP growth. On Friday, over in the US we also the latest non-farm payrolls release. Payrolls rose by 213k in June, modestly firmer than expected (consensus +195k, Investec +185k). Net revisions to the previous two months were +37k. Against this though, the unemployment rate rose back up to 4.0% from 3.8% (consensus and Investec 3.8%) and the annual growth in hourly earnings remained steady at 2.7% (consensus 2.8%). Also the participation rate moved up to 62.9% from 62.7%, suggesting that there is slack in the labour market compressing wage growth and therefore keeping inflation prospects mild. Markets took the data as softer than expected overall, which on balance it is. However as we know, the unemployment numbers are based on a relatively small sample which means that they tend to be volatile from month-to-month. There seems to be little here to dissuade the FOMC from tightening again in September.
The week ahead
Looking at the week ahead, the key releases in the UK are Tuesday’s ONS release of monthly GDP for May. This is especially tricky to forecast since last week’s GDP revisions have left us without an up to date monthly series for industrial production and construction, even up to April. BoE Governor Mark Carney speaks from the US on Wednesday, as do several of his MPC colleagues from different locations. The current mood music is signalling that the committee is seeking to lift interest rates earlier rather than later.
Thought of the day
Taking a step away from football (though it is still coming home), I heard a story recently which made me smile. It turns out Lamborghini, the Italian luxury sports car manufacturer, came into being after a falling out between Mr Enzo Ferrari and Mr Ferruccio Lamborghini. The story goes that Mr Lamborghini, who owned a successful tractor business, had a Ferrari and brought his grievances about the car and it’s servicing to Enzo himself. It’s said he didn’t appreciate the constructive criticism and told Lamborghini in so many words. In doing so, a rivalry was born as Lamborghini set out to build the perfect touring car with a passion for vindication. Here at Investec Dealing HQ we consider ourselves passionate men and women, be it about the football, the markets, or any number of things. Opposite me we have our resident golf expert and to my right, a rugby guru. If you fancy a chat about anything from the meeting at Chequers to our penalty tekkers, give the Dealing Desk a call on 020 7597 4000.