The Week Ahead: Elvis is found on Mars…

 "My chances of being PM are about as good as the chances of finding Elvis on Mars,” said Boris Johnson in July 2007. Well, with temperatures set to soar in the UK, the man himself is all but likely to be unveiled as the 25thUK Prime Minister on Tuesday. PM-in-waiting ‘Bojo’ is the overwhelming favourite to win the Conservative leadership contest, beating Foreign Secretary Jeremy Hunt into second place to succeed Theresa May. 

Sadly, the pound has not looked on this with such glee and sunk to its lowest in 27 months last week as the two candidates tried to outdo each other with hard Brexit rhetoric. This included pledges to leave the EU with or without a transition trade deal, come the October 31 deadline. 

Indeed, the Johnson camp has gone further, seemingly now willing to potentially ditch the Irish backstop, rather than try to fix it, as Brexiteers had wanted until recently, and lining up Jacob Rees-Mogg, long-time political collaborator and hard-line Eurosceptic, as a Brexit policy advisor. A first overseas trip to the US to cement the ‘special relationship’ with President Trump has also been mooted.  

Is this all grandstanding and simple ‘window dressing’ for the leadership campaign, or positioning ahead of new talks with the EU? It is very hard to see what a Johnson government will do to get any kind of Brexit deal over the line, but the cold hard facts are that there are only 99 days between PM May stepping down and the Halloween October 31 deadline to put a ‘deal or no-deal’ plan in place. In fact, the House of Commons rises for summer recess on July 25 and returns on September 3; from there, it’s only six weeks until the EU Summit on October 17.

All in all, if a compromise is to happen along the way, this may involve a transition period, which may then result in a confidence vote in Parliament and a general election. There is a lot once again that remains uncertain which is why market price action is bearish for sterling. Technical signals in the short-to-medium term tilt the balance of risks heavily in favour of further weakness. 

Thursday will see the ECB convene for its summer meeting with more stimulus in the pipeline due to the weak economic outlook, low core inflation and inflation expectations. After Mario Draghi’s dovish turn at Sintra in Portugal, many ECB members have continued this theme with a package of measures, including a re-start of QE, change in forward guidance and a cut the deposit rate all being touted. 

Markets are currently pricing in a 10bp rate cut for the September meeting, when the next ECB economic forecasts are released, and another cut in Q1. We think at this stage, opening the door to a cut in September and showing the market that the ECB can cut further will be enough stimulus. 

Stateside, earnings season will focus on ‘FAANGs’, especially after Netflix shares swooned 10.2% after it reported its first US subscriber drop in eight years. ‘FAANGs’ earnings and their shares have been crucial contributors to the record-breaking wall Street rallies this year and last.

The end of the week brings US Q2 GDP, with consensus expecting just a 1.6% headline gain, sharply reversing the bumper, inventory-boosted 3.1% Q1 figure. The underlying picture, however, should be strong enough for the Fed to ease policy by ‘just’ 25bps on July 31, rather than by 50bp.

After last week’s market volatility punctuated by various Fed speakers, the odds have dropped for a 50bp cut to below 20%, having been as high as 65% in the middle of last week.  

Have a great trading week!