Sterling still likely to be driven by politics
Sterling has spent the past 3½ years being buffeted by the politics of the UK’s departure from the EU. Now that Britain has formally left the union and entered a transition period, some investors expect the currency to gain as a reduction in uncertainty boosts confidence and economic growth.
But even the optimists think the pound’s status as a currency driven by politics is here to stay, with the shape of the trade deal with the EU set to dominate discussions later this year.
“The removal of uncertainty should help bring back some strength to the currency,” said David Zahn, head of European fixed income at Franklin Templeton. Mr Zahn added that concerns about a hard Brexit could return if there is no agreement on the table as the year draws to a close.
The path of growth, and the Bank of England’s response to it, will be crucial. Sterling has climbed modestly, trading above $1.31 against the dollar after the BoE decided not to cut interest rates last week. But many investors continue to bet on cuts later in the year, with markets pricing a more than 75 per cent chance of a reduction by September.
The probability of the BoE cutting rates increased after the central bank last week downgraded its view of the underlying prospects for the economy to the lowest level since the second world war.
“The BoE has made it clear that it will be looking closely at the data to determine the next move, so for now fundamentals should be the shorter-term driving force for the pound, until Brexit trade negotiations become front and centre again,” said Ian Tew, a sterling trader at Barclays. Tommy Stubbington
Will US manufacturing start to rebound?
Investors will have their first glimpse at the health of US manufacturing this year on Monday after a widely watched measure for the sector dipped in December to its lowest level since June 2009.
The Institute for Supply Management will release its January data showing manufacturing purchasing behaviour. Economists surveyed by Bloomberg anticipate the index to hit 48.5 points, a modest increase from December’s figure of 47.2, but below the 50-point level that separates contraction from expansion.
Equity investors are paying more attention to manufacturing data as a gauge for the health of the US economy in part because the Federal Reserve has moved into a holding pattern on interest rates, said Jonathan Golub, chief US equity strategist for Credit Suisse.
“The ISM manufacturing index is expected to get better,” Mr Golub said. “Stock market returns are strongest when the ISM recovers from depressed levels.”
On Friday, two other data points will help investors gauge the health of the world’s largest economy. The non-farm payroll numbers are expected to show 150,000 jobs were created in January, an increase from the 145,000 added in December, and the unemployment rate is set to hold firm at 3.5 per cent, according to a Bloomberg poll of economists.
The Fed is grappling with the dynamic of low inflation despite a tight labour market. Low unemployment typically leads to higher wages, increasing inflation. Richard Henderson
Will Australia’s central bank act as fires and coronavirus squeeze stocks?
Australian markets are under pressure, with the benchmark S&P/ASX 200 slipping about 2 per cent last week, before recovering. The coronavirus has hit the China-dependent economy, and its mining stocks in particular, while the nation continues to be shaken by bushfires of unprecedented severity that have squeezed insurance, dairy and travel stocks.
Against this backdrop, its central bank will on Tuesday decide whether an interest-rate cut is warranted. The economy is in decent shape, with the jobless rate dipping to a nine-month low of 5.1 per cent in December. Analysts are therefore not convinced that the Reserve Bank of Australia will be pressed in to action.
Sally Auld, chief economist at JPMorgan, said that while it was clear the virus would have a meaningful regional impact, the RBA would not rush in its assessment of the crisis.
However, she said that Australia’s exposure to the Chinese tourism market could be costly, as the viral outbreak curbs travel. “Is that enough to get them to cut [on Tuesday]? Probably not at the margin, but it does mean that they will be nervously on hold given the downside risks.”
Economists at the Commonwealth Bank of Australia agreed that there is no great risk of the RBA taking action, but National Australia Bank said the market’s estimate of the chance of a rate-cut is “too low,” at 31 per cent. Even if the central bank holds steady, NAB is expecting two cuts in the rest of this year.
“We have not been a believer in the RBA’s general upturn narrative and are even less so now,” the bank’s economists said. Primrose Riordan
Source: Economy - ft.com
