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Daily Brief - 19/02/2019

London Office

 

British Pound

 

Reuters: Sterling gained on Monday after registering three consecutive weeks of losses as investors waited for the outcome of Brexit talks between Britain and the European Union. A split in Britain’s opposition Labour Party - with seven politicians quitting on Monday in protest against Jeremy Corbyn’s leadership - will likely weigh on the pound as the move increases political uncertainty, according to MizuhoInternational. Meanwhile, Prime Minister Theresa May is leading a last-ditch diplomatic drive to persuade EU leaders to save her Brexit agreement as she faces a rebellion from Cabinet ministers who want to stop the UK leaving without a deal. Business leaders, increasingly fearful about the chaos that would ensue from a no-deal Brexit, are putting into place contingency plans across the board.


The pound climbed 0.3 percent higher at $1.2929. Against the euro it rose 0.2 percent to 87.30 pence. Sterling rallied more than half a percent on Friday, helped by reports of some hedge fund buying, a conciliatory tone on Brexit from the Irish foreign minister and strong British retail sales published earlier in the day. Broader currency markets were quiet with U.S. markets shut for a holiday. Some analysts said the split in Labour could help the pound. “A number of anti-Brexit Labour MPs resigning could push Jeremy Corbyn towards a different solution from what is now on the table and could be helpful to the pound as the market views a no-deal Brexit as the worst potential outcome for the UK economy,” said City Index senior market analyst Fiona Cincotta. May has told EU leaders she could pass her deal with concessions primarily around the Irish backstop issue but a symbolic defeat in Parliament last week weakened her negotiating hand. “Prime Minister Theresa May is setting off to Europe to ‘re-negotiate’,” Commerzbank strategists wrote in a daily note. “What a sad Sisyphean task! I cannot imagine that anyone assumes this might result in anything productive.” Derivative markets were cautious with two-month pound risk reversals, a gauge of calls to puts on the British currency, hovering near three-month lows. It was a sign of investor caution about the pound’s outlook in the near term.

 

US Dollar

 

Reuters:The dollar was steady against its peers on Tuesday, lacking strong direction as U.S. markets were shut for a holiday the previous day, while the euro’s latest bounce faded as the focus drifted back to the economy and European Central Bank policy. The dollar index versus a basket of six major currencies was nearly flat at 96.881 after ending the previous session unchanged. U.S. financial markets were closed on Monday for Presidents’ Day. Trump told reporters on Friday there was a possibility that he would grant an extension to the March 1 deadline, helping to tame fears of an escalation in the trade conflict. U.S. tariffs on $200 billion in imports from China are set to rise to 25 percent from 10 percent if no deal is reached by March 1.


The euro was down 0.1 percent at $1.1298. It edged up 0.16 percent overnight, pulling away from a three-month low of $1.1234. The single currency had been buoyed by improved investor sentiment as expectations increased for an easing of the U.S.-China trade conflict after both sides reported progress in talks. The dollar, the world’s most liquid currency, has tended to perform well during bouts of investor nervousness.The Federal Reserve’s recent shift to a dovish tilt was expected to affect ECB monetary policy. “If the Fed were to lower interest rates, it would be natural to assume that the ECB would follow suit. The dollar was a shade lower at 110.52 yen after gaining a modest 0.15 percent overnight.

 

South African Rand

 

EWN: The rand weakened in late afternoon trade on Monday as investors awaited Wednesday’s Budget when the finance minister is expected to unveil plans to shore up state-owned power utility Eskom. Stocks rallied, with the Johannesburg All-share index and Top-40 index touching 3-1/2-month and 4-1/2-month highs respectively, with investors growing hopeful the United States and China will agree a deal to end their trade war. At 1530 GMT, the rand was down 0.43% at 14.1300 per dollar compared with Friday’s close of 14.0700 in New York. Since the resumption of nationwide rolling power cuts by Eskom on 10 February, the rand has lost nearly 4%, breaching the psychological 14.00 mark as the crisis at the cash-strapped utility put a possible credit downgrade to junk back on the radar. Although Eskom paused the blackouts on Friday for the first time in five days, it warned its creaking infrastructure could buckle at any time. 

 

Finance Minister Tito Mboweni is expected to unveil a rescue package for Eskom in the annual budget on Wednesday. “The size and structure of the provision of support for Eskom will be a critical consideration,” RMB analysts Mpho Tsebe and Elena Ilkova said in a note. “Eskom remains a significant fiscal risk and providing it with financial support might be credit-neutral for the sovereign, only if this is accompanied by broader measures to stabilise the power utility,” they added. Government bonds firmed, with the yield on the benchmark paper due in 2026 down 2.5 basis points to close at 8.855%. On the bourse, the Johannesburg All-Share index ended the session up 1.16% at 55,259 points, a level last seen on 2 November, while the Top-40 index climbed 1.18% to 49,019 points, a level it last touched on 4 October. “A little bit more confidence coming back into the market, that the US and China can do a trade deal, so optimism is back again,” Cratos Capital equities trader Greg Davies said. US and Chinese officials will continue negotiations in Washington this week after both sides reported progress at talks in Beijing last week. Davies added that weaker rand was also helping the market “because the rand hedges and all the resources are climbing.” Rand-hedged shares make the bulk of their revenue outside South Africa and tend to rise as the currency weakens.

 

Global Markets

 

Reuters: Asian shares hovered near four-month highs on Tuesday as investors took heart from some progress in Sino-U.S. trade talks, while the yen slipped as the Japanese central bank said it won’t rule out further policy easing. Spreadbetters pointed to a positive start for Europe while E-mini futures for the S&P 500 and the Dow were a shade weaker. In Asia, Japan’s Nikkei nudged up 0.2 percent after holding flat for most of the day. Australian shares climbed 0.3 percent to a 4-1/2 month peak, after gaining over 8 percent so far this year partly on expectations the central bank could ease policy to temper pressure on growth. Chinese shares skidded into the red after surging in the previous session, with the blue-chip index off 0.4 percent. That left MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.1 percent, but still close to four-month highs reached last Wednesday. Trade talks dominated headlines with a new round of negotiations between the United States and China expected in Washington on Tuesday, and follow-up sessions at a higher level later in the week.

 

In currency markets, the euro was 0.1 percent weaker at $1.1295, not far from Friday’s three-month low of $1.1234, largely on a run of soft European economic data including Germany’s GDP figures. The Australian dollar was down 0.2 percent at $0.7116 following the release of the Reserve Bank of Australia’s (RBA) policy meeting minutes on Tuesday. The minutes of RBA’s first policy meeting of the year in February showed that the central bank saw “significant uncertainties” on the economy as the once high-flying property market nosedives, a major reason rate cuts might be back on the table. RBA Governor Philip Governor Lowe on Feb. 6 had opened the door to a possible rate cut by acknowledging growing economic risks, in a remarkable shift from its long-standing tightening bias that sent the Aussie tumbling. The precious metals market was slightly more lively, with palladium surging to a record high of $1,471.0 per ounce as stricter emissions standards are seen increasing demand for the autocatalyst metal. Gold held around $1,323.66 per ounce after earlier rising to a near 10-month high of $1,327.64. Oil prices were mixed, with Brent futures off 29 cents at $66.21, not far from Monday’s $66.83 which was the highest since mid-November. U.S. crude futures added 21 cents to $55.8.

 

Daily Brief - 19/02/2019

Hong Kong Office

 

British Pound

 

FXStreet: The Great British Pound rallied through trade on Monday pushing back through 1.29 and bouncing off a third consecutive weekly decline as investors take stock of current positions ahead of key talks between Brexit negotiators and the EU. Despite deeper political divisions and the resignation of seven labour politician’s sterling found support in optimism May will reach a last minute compromise with EU leaders as she scrambles to resuscitate her Brexit agreement. Increasing instability from within the conservative government and a push from ministers to stop the UK leaving without a deal has added support to the GBP as the possibility of an extension of Article 50 increases.


The pound remains vulnerable to broader Brexit negativity and as we move closer to the March 29 deadline without a deal the downside risks and uncertainty are only exacerbated. Business leaders are becoming increasingly fearful a deal will not be reached and are rushing to put in place contingency plans that could see key industries move large sections of operation outside the UK should the two parties split without a deal in place. Industry leaders have stated a no deal divorce would be catastrophic not just for their business interest but for the broader UK economy and politicians inability to grasp the true implications are truly terrifying.


Attentions today turn to wage growth and employment data as key macroeconomic indicators guiding BoE policy, while Brexit headline news dominates the broader directional theme.

 

US Dollar

 

Reuters: The dollar held steady against its peers on Tuesday, lacking strong direction as U.S. markets were shut for a holiday the previous day, while the euro’s latest bounce slowed as the focus drifted back to the economy and European Central Bank policy. 


The dollar index versus a basket of six major currencies was little changed at 96.784 after ending the previous session flat. The U.S. financial markets were closed on Monday for Presidents’ Day. The euro was little changed at $1.1312 after edging up 0.16 percent overnight, when it pulled away from a three-month low of $1.1234. The single currency was buoyed by improved investor sentiment as expectations increased for an easing of the U.S.-China trade conflict after both sides reported progress in talks. The dollar, the world’s most liquid currency, has tended to perform well during bouts of investor nervousness. 


The dollar was a shade lower at 110.59 yen after gaining a modest 0.15 percent overnight. The Australian dollar was flat at $0.7129 after dipping 0.15 percent the previous day. 

 

Japanese Yen

 

FXStreet: USD/JPY is currently trading at 110.58, just off from the early Asian high of 110.64 with bulls dragging their heels in the tentative correction of the end of last week's Valentines day sell-off where the bulls started to fall out of love with the dollar across the board. 


Meanwhile, optimism over trade talks between the US and China have kept spirits high, although there is still plenty to play for in Washington this week and what goes up, must come down when there are profits on the table to be had; Without there being anything concrete on the matter to beef up the headlines, sentiment will likely wear thin again unless a buy the rumour sell the fact trade is going to play.


Eyes should pay close attention to Asian stocks today in comparison to yesterday's positive performance with the Shanghai composite rallying around 2.68 percent to close at about 2,754.36 while the Shenzhen component added 3.954 percent to close at approximately 8,446.92. Hong Kong's Hang Seng index added 1.5 percent while Japan's Nikkei 225 ended 1.82 percent to close at 21,281.85 after a jitter open where traders were not quite sure what to make of the weekend China press that warned of cautious optimism over the trade talks.  

 

Global Markets

 

Reuters: Asian shares hovered near a four-month peak on Tuesday, supported by hopes that Sino-U.S. trade talks were making positive progress and expectations of policy stimulus from central banks. While investors were without any firm directional cues with U.S. markets shut on Monday for public holiday, sentiment remains broadly buoyant with the STOXX 600 index of European shares hitting four-month highs. 


MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed in early trade, staying near Wednesday’s four-month peak while Japan’s Nikkei was almost flat. Reports of progress in trade talks between the United States and China have prompted investors to be mildly optimistic that the two countries could reach a compromise to avoid tariff hikes on March 1, although few details from the talks have emerged. Reflecting changing sentiment, Chinese shares have risen rapidly so far this month, with MSCI’s China A shares index up 6.5 percent, by far the best performance among major markets. 


The precious metals market was slightly more lively, with palladium surging to a record high of $1,458.5 per ounce as stricter emissions standards are seen increasing demand for the autocatalyst metal. Gold rose to a near 10-month high of $1,327.40 per ounce. Oil prices held firm at three-month highs owing to a growing belief among investors that OPEC’s supply cuts will prevent a build-up in unused fuel. Brent futures rose to as high as $66.83 on Monday, hitting their highest levels since mid-November. U.S. crude futures rose 0.5 percent in early Tuesday trade to $55.86.

 

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