2016/10/05 Commentary: Pounded
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COMMENTARY: Wednesday, October 5, 2016
Pounded
It is most interesting that the British pound is, well, getting pounded in foreign exchange. Yet this should be less of a surprise to anyone who has been really paying close attention to the post-LEAVE Brexit vote market activity. In the first instance, there has been a lot of talk of a “soft Brexit” where somehow the UK maintains a good deal of the privileges associated with full European Union membership. That is especially important as it applies to financial services access to the EU market. That ignores the degree to which that is going to be decided in Brussels with some influence from more prominent individual EU members.
In that regard it was always going to be the best gambit for the UK to propose a full separation, and let those individual EU countries petition Brussels for a ‘reasonable’ position on reciprocal market access. While the focus has been on how much the UK has to lose by forfeiting its full EU financial services ‘passport’ (unencumbered access to the full continental market), there is quite a bit at stake for major European firms in quite a few financial services products. There is also the issue of the UK market infrastructure for some very large markets that will be very hard to replicate away from London.
Of course, the other reason why UK Prime Minister May’s weekend speech needed to propose the proverbial ‘hard Brexit’ was the one immutable demand of the successful LEAVE campaign: restrictions on the movement of labor. This is the singular item that was likely most important to the pro-Brexit camp, and drove quite a bit of the Leave vote. However, it is also one of the hallowed principles of the EU on which it was never going to compromise. The classical immutable force and immovable object.
As such, Ms. May had nothing to lose by reinforcing the notion of a hard Brexit being the only possible path. In fact, the further weakness of the British pound over concerns for the future of the UK was likely to still bolster the UK economy in the near term. As serial data has indicated, the UK economy has benefited in the near term from the Brexit vote in spite of the dire pre-Brexit forecasts. This is all consistent our June 30th “Advantage FTSE” post, even if that dynamic was a surprise to the Brexit doom-and-gloom analysts. Please revisit it for full explanation of the driving forces.
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ What we know for now is the same as mentioned in Tuesday morning’s brief email note that focused primarily on the key changes in the FTSE and British pound. For now the Market Observations in the lower section of last Wednesday’s Advantage Clinton post remain the relevant views. That is in spite of some market movement on the recent improvement in US data and the attendant return to more hawkish communication from the various Fed minions this week.
That includes the current pressure on the govvies and friendly equities response to the improved US economic data. Foreign exchange has seen a bit of US dollar strength against developed economy currencies, yet nothing trend decisive except the weakness of the pound. Of course, as noted above that is more so based on pound weakness against all other currencies than any secular US dollar strength.
There was quite a bit of Fed-speak on Tuesday with a bit more likely hawkish influence to follow into midday today. That will intensify during the coming G20 meeting accompanied by the IMF/World Bank meeting into the weekend. All of the specifics of other influences as well are available in the Current Weekly Report & Event Calendar (available to Sterling and higher level subscribers) via the link in the sidebar.
▪ Yet for the most part, other than govvies dropping down to more important technical support, the markets are not that eventful right now. The notable obvious exception is the divergent fortunes of the FTSE and British pound in the wake of UK Prime Minister May setting a definitive date for the UK triggering Article 50 to begin its formal EU withdrawal negotiation next March.
As a quick update on those two, the FTSE has benefited from the weakness of the pound since shortly after the LEAVE camp prevailed in the Brexit vote. The principles driving this movement remain pretty much the same as outlined in our June 30th “Advantage FTSE” post, even if that dynamic was a surprise to the Brexit doom-and-gloom analysts. Please revisit that post for the full explanation of the near-term driving forces. For now the FTSE has jumped the recent and historic 6,900 area congestion to push up near the 7,200 area multiple April 2015 all-time trading highs. A weekly Close much above that area would also violate a key weekly Oscillator threshold, indicating a likely move to at least 7,350.
The British pound represents the mirror image weakness that is driving that FTSE strength due to the advantage it is providing UK exporters. As noted in all recent Market Observations, the ability to previously hold the 1.3000-1.2950 area was critical after the post-Brexit slippage below it into July and August. Finally failing below it into this week on the back of Ms. May’s definitive Article 50 decision, lower interim support was the early July 1.2800 trading low that has now been violated, with only an interim historic level in the 1.2500 area below that. The next prominent support is not until 1.1850. While there are further interim supports at 1.1550 and 1.1250 congestion, the more major support below that is not until the 1.0463 February 1985 all-time low.
▪ The Evolutionary Trend View market indications outside of the FTSE and British pound remain the same as the Extended Trend Assessment Market Observations in the lower section of last Wednesday’s post; even in the govvies in spite of their recent weakness. We will be updating those after the US Close to capture all of the recent market activity in the wake of this morning’s better-than-expected US data in the wake of mixed Services PMI’s elsewhere.
Extended Trend Assessment is available below.
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