Sterling sinks as recent poll causes risk aversion...

Week Commencing Monday 13th June 2016

Overriding Market Themes

We start this week in the UK, where Britain's trade deficit narrowed in April after goods exports rose to a near three year high. The ONS said the UK’s total trade deficit narrowed to 3.294 billion pounds in April from a downwardly revised 3.532 billion pounds in March, its lowest level since September 2015. The deficit in goods alone narrowed to 10.526 billion pounds from 10.646 billion pounds, compared with economists' forecasts for it to hold broadly stable at the original March estimate of 11.2 billion pounds. Goods export volumes jumped 11.2 percent on the month, the biggest rise since records started in 1998, taking the total value of goods exports in April to 26.123 billion pounds. The increase in exports to the EU follows a steady rise in economic growth across the 28 member states, at a time when emerging economies have struggled to maintain the strong expansion of the last two decades and previously fast growing countries Russia, Brazil and South Africa have slumped into recession.

Moving to the US, Federal Reserve chair Janet Yellen said a UK vote to leave the European Union poses significant economic repercussions to the US and the rest of the world. Eurostat showed that GDP growth in the first quarter was 0.6 percent, after being reduced to 0.5 percent in an earlier estimate, pushing the annual growth rate up from the previous estimate of 1.6 percent. Among the largest economies in the EU, France grew at 0.6 percent, Germany 0.7 percent and Spain 0.8 percent. Italy could only manage a 0.3 percent growth rate while Greece contracted by 0.5 percent, Poland slipped by 0.1 percent and Hungary suffered a 0.8 percent drop in national income. It seems that the worst may well be behind Europe, ironically 2 weeks before a vote to break up the Union! campaigners for the UK to remain in the EU are likely to welcome the figures, which show the rise in Eurozone growth and the 0.5 percent average rise in GDP for the 28 countries of the EU outstripping the UK’s 0.4 percent growth rate in the first three months of the years.

Finally, growing anxiety over the prospect of the UK exiting the European Union has spooked investors worldwide, hammering equities and weakening Sterling. Economists predict a vote for so-called Brexit will send the pound to the lowest level in more than three decades, while a victory for the ‘Remain’ camp would drive the currency toward the highest this year. Also keeping investors on edge are monetary policy reviews being held this week in the US and Japan. Sterling dropped as much as 0.7 percent this morning, having slumped 1.4 percent on Friday after an newspaper poll showed 55 percent support for the Leave campaign, and 45 percent for Remain. Surveys during the weekend were more balanced, with an online poll for the Observer newspaper showing 44 percent support for Britain staying in the EU and 42 percent against. Gold, the ultimate safe haven asset, rose as much as 0.8 percent to USD 1,284.29 an ounce, the highest since May 16. In 10 days we shall have our answer, what happens to markets then will be up to the British people!


GBP This Week

The data calendar is busy this week, but we expect GBP to be more responsive to swings in opinion polls than to positive data surprises. We expect the Bank of England to see inflation edge slightly higher on the month, with CPI potentially pushing higher in May to 0.4 percent. Consequently, we expect core inflation to edge up to 1.3 percent on the year. The employment report should confirm that the unemployment rate will remain unchanged at 5.1 percent, which core wages should grow at 2.3 percent on the quarter. Finally, we expect the Bank of England not to change any form of policy direction during Thursday’s MPC vote.

As discussed above, expect GBP to react to polling this week as we draw closer to the referendum date. Expect strength on solid Remain leads while any disenable leads for the Leave camp should continue to weaken Sterling.

USD This Week

Firstly we expect the FOMC meeting on Wednesday to be a non-starter, especially in the context of increased global uncertainty surrounding Brexit and the most recent employment report. Additionally, we expect the CPI report on Thursday to show inflation has risen by 0.3 percent for the month of May, while core CPI should be up 0.2 percent and 2.2 percent on the year. Retail sales on Tuesday should advance 0.4 percent on the month, adding to the gains we saw in last month’s 1.3 percent rise in this index.

The Greenback should see gains this week as investors flock to the safety of US treasuries, especially on GBP/USD. EUR/USD should also feel the pinch as Brexit woes begin to raise questions regarding a European strategy to a Brexit scenario.

EUR This Week

As with the UK, we expect EUR weakness as we draw closer to the EU referendum date given the uncertainty. The precedent of a member state leaving the union could be used as a political argument by populist and extremist parties in several other European countries to push for an EU exit, significantly increasing uncertainty about the future of Europe.

We have a relatively light week ahead on the data front, with Euro area industrial production on Tuesday set to rebound by circa 1.1 percent in April. Also in the limelight is Euro area inflation where we expect headline and core HICP numbers to be confirmed in at -0.1 percent and 0.8 percent in May respectively.



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