Morning Report: 12 June 2018

June 12, 2018

GBP Sterling posted losses against both the dollar and the euro yesterday, with news headlines focusing on Brexit uncertainty and the current government’s ability going forward with negotiations. However, the main driver of sterling’s losses came after UK manufacturing data posted a shocking 1.4% decline for last month, representing the biggest month-on-month fall in over five years. The data from the Office for National Statistics also showed Industrial Production falling by 0.8% MoM in April, a particularly disappointing reading given the forecast 0.1% increase. The poor economic readings were compounded by monthly Construction Output coming in well below forecast, alongside news that the trade deficit had also widened in April. Perhaps the only saving grace for the pound was that economic data over recent months has been so generally poor that it has become almost a secondary concern to market sentiment. Today is a new day, however, and sees the start of a two day vote in Parliament over key amendments by the House of Lords on the European Union withdrawal bill. The two amendments that the House of Lord’s have inserted that look set to be most tricky for the government to avoid regarding a clause that would give Parliament the decisive vote over the final Brexit deal, rather than simply the government, and another which would force Prime Minister Theresa May to negotiate a customs union with the EU, rather than the government’s preferred stance of a lesser “customs arrangement”. Should these amendments not be rejected, it calls into question the current government’s ability to execute a final Brexit deal. Today with regards to economic data, unemployment data in the form of the Claimant Count Rate and the ILO unemployment rate is released, with the latter forecast for no change at 4.2%.

EUR The euro performed relatively well against the dollar yesterday, with Italian assets rallying after Italy’s Finance Minister said that the newly installed coalition government would not discuss exiting the euro, and would avoid creating market conditions, such as a large fiscal deficit, that would force an Italian exit from the finance area. Today at 10:00 BST, the German ZEW current situations and expectations survey is released. Traditionally a good leading indicator for German growth, forecasts expect a moderation in both readings. This would not bode well for the likelihood of the European Central Bank discussing the beginning of monetary normalisation, with economic growth already starting to fade in the eurozone, and Germany being the single currency’s biggest economy.

USD USD advanced yesterday and maintained its momentum overnight, as media attention focused squarely on today’s historic meeting between Donald Trump and North Korea’s Kim Jong-un. The summit appears at this stage to have been an unprecedented success, with both sides reportedly signing a document while hailing a new era of improved relations. Previous nuclear deals and negotiations with North Korea have ended in failure – and the nuclear armament of the reclusive state. Elsewhere, yesterday US equities rallied in general, despite the likelihood of a trade war with key trading allies appearing to increase after the weekend. The US Consumer Price Index is released at 13:30 BST today with a YoY increase in consumer prices of 2.7% forecast, up from April’s 2.5%. CPI inflation is not the Federal Reserve’s preferred measure, but provides further information on the state of the US economy ahead of Wednesday’s Fed meeting.

CAD The loonie was the second biggest loser after the Japanese yen out of all G10 currencies against the dollar yesterday. USDCAD reached session highs as WTI crude slumped 1% for the day, however, it soon rallied over a percent to end the session up from its open. This did not provide the impetus for loonie’s rebound, despite the currency tracking crude oil prices relatively well, as risk over a trade war with its main trading partner, the US, remains on the cards.

UK news

  • Financial Times: Theresa May faces 48 hours of Brexit votes Theresa May pleaded with Conservative MPs on Monday not to tie her hands in Brexit negotiations in Brussels, as party whips hoped they had bought off Tory rebels ahead of 48 hours of potentially knife-edge votes in the House of Commons.
  • Reuters: Trump, Kim sign agreement after historic summit but few specifics U.S. President Donald Trump and North Korean leader Kim Jong Un pledged on Tuesday to work toward complete denuclearisation of the Korean peninsula while Washington committed to provide security guarantees for its old enemy.
  • Wall Street Journal: U.S.-Canada Rift Roils Nafta Talks A backdrop of new hostility is hurting chances for Washington and Ottawa to successfully overhaul the North American Free Trade Agreement, say people close to the talks, even as Canada has vowed to forge ahead with the negotiations.

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