BREXIT, China & Brazil all lead a mixed market this week...
Week Commencing Monday 18th April 2016
Overriding Market Themes
Starting this week’s news in the UK, Minutes from the latest meeting of the Bank of England’s Monetary Policy Committee states that the looming referendum is having a profound effect on the economy, noting that many major capital spending decisions and property transactions were being delayed, pending the outcome of the vote. Despite the potential political impact of the statement from the bank, it did state that the decision was “a matter for the UK electorate” and that the long-term impact was “unclear” because of uncertainty over the UK’s future relationship with Europe in the event of Brexit. Campaigners in favour of quitting the EU said the central bank had compromised its officially neutral stance in the debate. Governor Mark Carney had previously described “Brexit” as the biggest domestic financial stability risk and highlighted the gains from an open trading relationship with the EU. The pound has lost more than 7 percent this year on a trade-weighted basis and reached a 2 and a half year low last week. Scare stories are rife, however all depends on the result of this referendum. Some analysts are even suggesting a rate as low as 1.25 on GBP/USD should “Brexit” occur! One thing is certain, interesting times lie ahead!
Moving to Brazil now, congress voted on Sunday evening to impeach President Dilma Rousseff, ushering in a new period of heightened political uncertainty in Latin America’s biggest economy. The decision threatens to bring an abrupt end to 13 years of Ms Rousseff`s socialist Workers party rule and allow her vice-president Michel Temer to form a new government. Rousseff’s chances of survival now look slim. Brazil has turned dramatically against the first female president the country has had. Once considered one of the most popular leaders in the world, with approval ratings of 92 percent, Rousseff has since seen her support plunge as a result of economic recession, political turmoil and the investigation into corruption at Petrobras, which has implicated almost all of the major political parties. Recent polls suggest only 10 percent of the public think the president is doing a good job and 60 percent support her removal. Brazilian stocks extended a rally that has pushed the benchmark Ibovespa up 23 percent this year as markets hope a new government that can fix the embattled economy.
GBP This Week
The impending EU referendum will remain the chief focus this week as Chancellor George Osbourne testifies to the Treasury Select Committee on the economic costs and benefits of EU membership on Wednesday amid extremely tight polls.
On the data front, labour market data this week should show a small drop in the unemployment rate in February to 5.0 percent, however lower than expected headline wage growth will likely keep markets mixed. The March claimant count should drop by over 17k, while UK retail sales on Thursday are likely to drop sharply in March as consumers take stock after the festive sale season at the beginning of the year.
USD This Week
The week is relatively light week on the data front. Housing market data comes out first, with the NAHB home builders index released on Monday, housing starts on Tuesday, and existing home sales on Wednesday. Markets will acknowledge these releases if we see a stark deviation from the expected prints, so expect very little impact on the greenback until Thursday. Moving to Thursday, we look for the Philadelphia Fed manufacturing index to ease to 10.0 in the April reading, providing further evidence of stabilisation in the sector. Finally, we forecast the Conference Board’s index to rise by 0.4 percent in March, with higher stock prices, interest rate spreads, and new manufacturing orders driving the increase.
EUR This Week
This week markets should concentrate on the ECB, which is widely expected to leave rates unchanged on Thursday. They should however provide additional details on the easing measures announced last month that have yet to begin, such as the Corporate Sector Purchase Programme and the new series of Targeted Longer-term Refinancing Operations. Given the mixed bag of economic data from Europe of late, we expect the tone of the minutes to be somewhat dovish in nature, adding some pressure to the Euro which has been performing well versus its peers. With this in mind, expect EUR/USD to trade down on the week, potentially pushing 1.11 – 1.1150.