The Week Ahead: Happy Friday 13th!

We have a huge week ahead of us. The trusted themes of the past year or so which have engrossed/excited/horrified us are coming to the fore in what is certain to be a volatile week for all. Brexit and trade are those themes and we are likely to get some clarity on the chaos and obfuscation that we have seen. To say that with certainty has been a rare thing, but for sure the UK election this Thursday will lead us further along the Brexit journey.

What has been billed as the most important UK election in decades will potentially shape the nation’s economic wellbeing for generations to come. Some see this as ‘an election of last resort’ due to the months of parliamentary gridlock and the underwhelming and uninspiring campaign. Others are more optimistic believing the current government’s plan has all the ingredients for an economic boom. 

What is clear from last week’s break higher in sterling from six weeks of consolidation is that the markets are gearing up for the Conservatives to win a working majority. This will mean Brexit, or the withdrawal agreement at least, is delivered on January 31. There will then be less than a year to work out the entirety of the future relationship with the EU. 

If the polls are correct and the Tories prevail, the question is how much more can the pound appreciate after its near 10% gain to the dollar since August. ‘Buy the rumour, sell the fact’? Speculators are still short as are active currency managers and a relief rally on account of poll scepticism is also possible. However, the uncertainties of negotiating a trade agreement with the EU will loom large and should expectations be dashed, then sterling will be highly vulnerable. 

Interestingly, some polls over the weekend have narrowed and it will not take that much more for the balance to swing back towards a hung parliament. Pollsters believe the gap between the two major parties needs to narrow to six points for this to come into play. 

The US-China trade negotiations will inevitably be the key driver throughout the week for the wider markets. This will probably become more amplified after the Federal Reserve meeting on Wednesday. Having cut interest rates a cumulative 75bps over the last three meetings, the FOMC is fully expected to keep rates unchanged and remain in ‘wait-and-see’ mode. Friday’s strong jobs report gives Chair Powell plenty of cover to confirm the economy is in a good place, with equities riding near all-time highs and the yield curve having re-steepened, so indicating little chance of a recession. 

Meanwhile, trade policy risks will be monitored very closely to see if there is enough progress in negotiations to get a ‘phase one’ deal. Otherwise, President Trump is set to impose a 15% tariff on $160 billion of Chinese imports on December 15 and this would likely see a big decline in stocks markets and increased uncertainty around the global economic outlook. Notably, this tariff could hurt the US more than China as it covers electronic consumer goods that are mainly produced by US companies in China and then exported to US consumers. 

The final risk event to watch out for, even though if may not be hugely market moving, will the ECB meeting on Thursday as it’s the first one under the leadership of President Lagarde. We can expect continuity from her rather than a fundamental change of strategy, reflecting the views of the Governing Council. Dealing with all those members will take all her obvious diplomatic skills as the rift between the doves and hawks is quite sizeable at present.