After a slow start to the week and a disappointing day for European markets yesterday, as investors took some profit on recent gains over concerns that the US is intent on turning its sights on the EU with respect to trade after US officials proposed a list of EU products that would face tariffs in retaliation for subsidies to Airbus.
US markets also had a rare off day closing lower ahead of a day where tail risks could come from one of three different directions.
We can begin by looking at the latest EU Summit where we’ll find out whether the UK has managed to get an extension to Friday’s 12th April deadline, or risk leaving the EU without a deal.
It is important to remember, despite all the noise about MPs taking no deal off the table with their waste of time parliamentary motion this week, that nothing of the sort has happened.
No deal still remains the legal default in law and can only be changed by an outright revocation of Article 50 by MPs, an agreement of the withdrawal agreement, or by the EU granting an extension.
The UK can ask for an extension, which is what Prime Minister May has asked for today, but that doesn’t mean we will get one. An extension is entirely in the gift of the EU and will be on terms offered by them. Everything else is noise, and MPs really ought to be better informed.
Assuming that the UK gets an extension, which seems likely given all the other unattractive alternatives, it won’t be until the 30th June as the UK wants, it will be for a much longer period, either until the end of the year, or possibly longer. This will inevitably mean that the UK will have to take part in European elections which is unlikely to be well received by a lot of people, and could well poison the well of UK politics even more than it already is.
It also makes the prospect of a general election much more likely, assuming all other options remain out of reach. That includes the prospect of a second referendum, which at the moment there doesn’t appear to be much appetite for, apart from a noisy minority. Furthermore, any second poll may well lack the legitimacy of the 2016 one simply on the basis of turnout if people don’t bother turning up to vote.
Yesterday’s stock market losses appeared to have been aggravated by the latest IMF growth projections which were downgraded to their lowest levels since the financial crisis, with particularly heavy cuts to Italy and Germany.
It is against this back drop that markets will be paying particular attention to the latest European Central Bank rate decision, and further details on how the ECB will be looking at how it intends the new TLTRO loan program can be expected to work when it starts in September.
There has been talk of tiering the loan structure in order to help mitigate the damaging effects the negative rate environment is having on European banks profitability. Today’s press conference from ECB President Mario Draghi is likely to be closely analysed for any clues as to how much additional discussion has taken place about this rather creative idea.
As it is the need for the ECB to be more nimble has become much more urgent since the last meeting given the sharp drop offs in some of the latest manufacturing PMIs from Germany, France and Italy. Another problem is that inflationary pressure remains anchored near the lows with core prices at 0.8%, just above the all-time low of 0.6%.
Against this backdrop it is perverse for the ECB to maintain the pretence that the risk of a recession remains low and that it expected rates to remain low until the end of 2019. It would be surprising if the ECB were not to acknowledge the change in economic conditions since its March meeting given that markets aren’t pricing in a rate rise until 2021 at the earliest.
We also have the latest Fed minutes where we’ll get to see what prompted the Fed to come over all dovish, less than three months after raising rates at the end of last year. We’ve gone from the prospect of three rate rises this year, to no rate rises at all and the balance sheet run off to end by September, in the space of ten weeks.
The Fed also downgraded its growth forecasts for this year, and for all of those who were holding out for one more rate rise this year, those rather remote expectations have also gone, which would appear to shift the calculus to when can we expect to see a possible rate cut.
While the Fed may want to push back on such expectations, the reality is markets are already starting to price in a 53% prospect of a rate cut by year end.
This makes the coming week’s minutes all the more instructive in the context of the tone of the debate, and how much consensus there was around the sharp turnaround in the central banks’ guidance, and what if anything the Fed are seeing that we aren’t.
EURUSD – still have solid support at the 1.1180 area, with a break targeting the 1.1000 level. The current rebound could well see a run up to the 1.1340 area and 50-day MA. Upside likely to remain limited to the 200-day MA at 1.1460 if we move above the 50-day MA.
GBPUSD – the 200-day MA and 1.2960 area continues to act as solid support. Unlikely to move much beyond the 1.3170 area until we get a clearer political picture. Below 1.2960 opens up the 1.2800 area.
EURGBP – needs to push above the 0.8650 area to argue for a move towards the 0.8720 level. While below here the bias remains for a move back to the recent lows at 0.8500.
USDJPY – has continued to drift lower falling below the 111.20 level and potentially opening up further losses towards the 110.20 area, with interim support at the 110.70 level. We need to move back above 111.30 to argue for a return to last week’s peaks.