FiboGroup Market Analysis 2018

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The British pound has had a disastrous start to the trading week after a double dose of bad news, which guarantees the Bank of England will keep rates on hold next week and according to some maybe longer.

Industrial production figures released yesterday hit the market at -0.8 percent against analysts’ expectations for a figure of 0.2 percent while the manufacturing production figures fared even worse coming in at -1.4 percent against expectations for a figure of 0.3 percent.

This was followed up by wage growth figures today which also disappointed the market and adds evidence that the UK economy is not as in good shape as earlier expected.

"This data could fuel Bank of England concerns and uncertainties over the economy and there can be very little doubt that the Monetary Policy Committee (MPC) will leave interest rates unchanged at their June meeting next week," said Howard Archer, chief economic advisor to the Ey ITEM Club.

"The data also makes an August interest rate hike by the Bank of England look a lot more questionable," he added.

The troubles with the British pound may intensify as the British parliament take a crucial vote on the amendments which were introduced by the house of lords regarding the Brexit vote.

If the parliament fail to overcome the changes by the lords speculation is rife that Prime minister Theresa May will be forced to resign as Prime Minister which will throw the UK government into chaos and as result the British pound will see much bigger losses as the chances of hard Brexit and no deal with the EU become a reality.

 

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The Euro has stabilized in today’s trading session after suffering a big drop on Friday and the losses may continue to come as political instability grips the EU

German chancellor Angela Merkel has been one of the most welcoming political leaders in Europe by opening the borders and letting in an estimated one million migrants over the last 3 years and now that kindness is coming back to bite as her own party turn on her which may see the end of her political career as early as this week.

Merkel wants Germany to abide by European rules concerning immigrants while her government colleagues are demanding that Germany close the borders to New immigrants which some say would cause chaos on the European continent as also spell disaster for the Euro.

“Angela Merkel’s coalition is coming under increasing strain over the migrant issue. Ms. Merkel is insisting that Germany abide by a pan-European solution while her partners are pressing for a German only policy response,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

“The friction is so tense that markets are becoming genuinely concerned that her government could fall which would have hugely negative ramifications for the euro as Germany is the de-facto anchor for the currency. The pair looks vulnerable to test 1.1500, but could fall much further if the crisis in Germany spins out of control,” he added.

The real crisis looming in the background is the fear that restricting immigrants with border checks may be the start of tighter border controls which then may lead to the destruction of the Schengen zone and the freedom of movement for EU citizens.

Merkels partners have promised to fight to the end in order to avoid this situation.

“The CDU stands behind the chancellor; the CDU stands behind a European approach,” said Armin Laschet, prime minister of North Rhine-Westphalia and a deputy CDU chairman.

“We will not accept abandoning the Schengen system on the borders with Belgium, the Netherlands, France and Luxembourg. We will fight for that, and on this point there’s no latitude for the chancellor.” he added.

 

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The British pound has slumped to the lowest level this year against its US counterpart as political instability grips the UK which may lead to the collapse of the government.

The Lords once again defied the government and voted for a Brexit Bill that would give parliament the chance to vote on the final deal between the EU and the UK regarding the break up.

The UK is known to have one of the most stable political systems in the world, so with the current situation, investors are becoming nervous and dumping the pound.

“Political risks continue to haunt sterling,” said Valentin Marinov, head of Group of 10 currency strategy at Credit Agricole SA.

The “vote in the House of Commons on the EU withdrawal bill amendment could become the focal point of market anxiety and fears about the British political outlook on the road to Brexit.” He added.

Prime minister Theresa May’s government is now on the back footing and will be forced to negotiate with ministers who disapproved of her Brexit plans, and failure to do so may see the end of her political career.

“Theresa May showing signs of weakness and an inability to control her party wouldn’t bode well for the future as several other pieces of legislation are still needed in order to prepare for Brexit.” said Jasper Lawler, head of research at London Capital Group.

“This will not only test May’s ability to steer a minority government, but also the pounds buoyancy as pro-EU rebels promise they can collapse the government if their demands aren’t met,” he added.

This Thursday’s interest rate decision from the Bank of England should bring no surprises with the majority of analysts predicting that the central bank will keep rates on hold.

It is the following monetary statement that investors will pay attention to as the BOE outlines their monetary policy for the rest of the year, and if there are no signs of any rate rises as the year unfolds the pound is expected to see further losses.

 

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The British pound is now on track to stage its 3rd straight day of gains after a bullish statement by the bank of England last week regarding interest rates but some say the big picture, namely the actions surrounding Brexit will keep the currency from sustaining any meaningful rally.

The European Union summit due to take place this week is seen as crucial to the pounds direction and all eyes will be on Prime Minister Theresa May and what type of deal she can negotiate to keep the Brexit process moving forward.

Any signs that the PM is losing the upper hand in talks is likely to see the British currency take a big hit as it could be the beginning of the end for any deal between the UK and EU which would see Great Britain crashing out of the block which has become known as Hard Brexit.

“The BOE gave sterling some support but that will probably peter out the closer we get to the summit,” said Georgette Boele, currency strategist at ABN Amro Bank NV.

“It is a lot of back and forth in U.K. politics and that complicates negotiations with the EU,” she added.

Two of the largest employers in the UK namely Airbus and BMW have added fuel to the fire by noting that any type of Hard Brexit would put thousands of jobs in the UK in jeopardy and may force many companies to quit the UK all together which would be disastrous for the local economy.

“A no-deal Brexit must be avoided, as it would force Airbus to reconsider its footprint in the country,” noted representatives from Airbus.

 

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The oil price hit in the US continued to make higher ground today, hitting a new 3 year high as concerns over the upcoming sanctions over Iran begin to spook the market.

The United States has made it clear to other countries that they must stop importing oil from Iran by November at the latest in order to punish the country from how the Trump administration puts it, a continuation of their nuclear weapons program.

The big question is will China agree to take part in the sanctions, as they are the biggest importer of Iranian oil and fail to do so may see Iran still release a sizable amount of oil to the market after the sanctions are enacted.

If China fails to make any commitment regarding the sanctions, we may see the trend of oil reverse again.

"The sanctions are trying to isolate Iran a bit more, and that potentially cuts more oil off from the overall global arena as a whole," said Mark Watkins, a regional investment strategist at U.S. Bank Wealth Management.

"If you're having Iran's oil taken off the market, then you have a decrease in supply and by all means, that's going to put more pressure on the price of oil to move up." He added.

US refineries have also been increasing production, which has led to record exports and as long as oil remains at current levels above $70, production is only set to increase as US drillers look to take advantage of higher prices which hinge on the success of the sanctions against Iran.

"Obviously, a very bullish draw" on American inventories, driven by record crude exports and refinery-processing rates, said Nick Holmes, an analyst at Tortoise in Leawood, Kansas, a company which oversees $16 billion in energy related assets.

"Exports continue to be extremely robust." He added.

 

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After bouncing off a more than 6 month low in yesterday’s trading session gold has continued to drift higher today, and some say for the precious metal to make any really significant gains the US Federal Reserve will have to reign in their hawkish stance.

Gold has failed to capitalize as a safe haven on recent world events such as the uncertainties surrounding Brexit, as well as the trade wars brewing between the US and China, which has left investors, scratching their heads and pondering over what will it take to push prices higher.

One analyst believes that gold’s tradition support base such as political instability or higher inflation are on the backburner for the moment and only the US central bank can help push prices significantly higher if they back off their determination to keep raising interest rates.

He also said that a continuation of the stimulus programs in Japan and the EU currently underway could also support the price.

“I think what ultimately drives gold higher will be the Fed pausing and then the market pausing in the Fed easing. And so if the Fed is easing while the ECB European Central Bank is printing and the Bank of Japan is printing then I think gold will do really well.” Noted Chris Mancini, research analyst at Gabelli Funds.

“I think what gets gold to really move will be a view that the economy is going to slow and the Fed is going to halt its tightening cycle,” he added.

 

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he trade war looming between the US and China is bound to have a profound effect on the Australian dollar and we may see some significant losses after tomorrow’s events.

China is Australia’s biggest trading partner and the tariffs due to be introduced tomorrow by the US government on China is expected to send shock waves through the world financial system with riskier currencies such as the Aussie dollar expected to suffer

Even the Australian Federal government is weighing in on the Argument by noting that Australia would not be dragged in to trade wars but this is likely to have little influence on the situation as it unfolds.

“It is of concern and Australia will continue to advocate for free and open trade and investment because that is of great benefit to our country and free trade has benefited the world. It is a position that we have made very clear to our American friends and will continue to promote free and open trade and investment.” Noted Australian Foreign Minister Julie Bishop

Another casualty of the trade war is the perception that an interest rate hikes from the reserve bank of Australia will be delayed even further which is only going to add to the woes of the Aussie dollar.

Some analysts say it has completely removed the chance of a rate hike from the RBA this year.

"The Reserve Bank of Australia is in no hurry to tighten monetary policy, especially in the current environment, with fears of a looming trade war between the US and China. says Georgette Boele, a senior FX strategist at ABN Amro.

“We therefore no longer think it is likely the RBA will hike interest rates in 2018, and now expect policy to remain on hold this year. We maintain our forecast for two 25bp rate hikes in 2019," he added.

 

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he British pound is expected to face a tough time this week after ministers from British Prime minister Theresa May’s cabinet suddenly quit their posts, which has raised speculation that a leadership challenge could come as early as this week.

Firstly, it was Brexit Secretary David Davis who quit the government over the state of Brexit negotiations which was followed by the resignation of foreign Secretary Boris Johnson who claimed that the British public were being sold out with regards to Brexit.

It is no secret that Johnson has had his eye on the top job for a long time and is seen as one of the candidates to challenge Prime minister May but some analysts say the move could backfire.

The reason is a leadership challenge may open up a window of opportunity for the Labor government to take power which have their own version of Brexit which would send the UK economy into a tailspin and this would be devastating for the pound.

“The resignation of Johnson will add to market fears of a leadership challenge, in the process risking further U.K. political paralysis,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce.

“Events of the last 24 hours suggest that more extreme Brexit conclusions are on the rise, suggesting sterling volatility should move appreciably higher.” He added.

The political instability has also cast into doubt the bank of England’s ability to lift interest rates next month and the consensus is if there is a leadership challenge a rate hike will most definitely be off the table which will also be bad news for the pound sterling.

 

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The political uncertainty currently surrounding the UK as well as US President Donald Trump’s upcoming visit to the country may be just what Gold needs to break out of its recent trading range.

Brexit Secretary David Davis was the first to resign from May’s cabinet over differences about Brexit negotiations which was followed by the resignation of foreign Secretary Boris Johnson who believes that Prime Minister May is not adhering to the will of the British people by demanding a soft Brexit which would keep the UK tied to the EU in many aspects.

Some say the recent events may lead to a leadership challenge this week with Boris Johnson’s name being passed around as one of the potential candidates.

The danger of a leadership challenge is it may be a stepping stone to a general election, which mat even, remove the Tories from power allowing the labor government to take over.

Gold would be a big beneficiary of such a scenario as investors seek out safe havens because of the potential financial turmoil a snap election would cause.

Another factor that may help the gold price recover is rumours that the US Federal Reserve may not lift interest rates as high as the market thought earlier in the year.

These expectations have had a dramatic effect on the gold price as investors snapped up US dollars in anticipation of higher rates so if the Fed does indeed scale back on their rate hike ambitions, gold should receive a further boost.

“It is likely that many gold market participants may be walking back their somewhat lofty Fed rate hike expectations, which along with angst in the emerging economies and trade concerns, should provide support to their currencies, which in our opinion have been instrumental in placing a pall on gold,” said TD Securities head of global strategy Bart Melek.

“The yellow metal is projected to move past $1,270 during the summer months. Indeed, we would not be surprised to see the yellow metal move into $1,300 in the final three months of 2018,” he added.

 

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The oil price has risen around 13 percent over the last 10 days which has pushed up gasoline prices in the US to uncomfortable levels and with elections in America on the horizon some say that we may see a few tactics employed to drive down the oil price.

Gas prices have now surged past the $3 a gallon mark, which has the potential to sway voters at the upcoming elections against the party in power which in layman terms means voting against Trump’s Republican Party which will break his majority in the senate.

Trump has a few aces up his sleeve to reduce the oil price such as opening up the US’s strategic oil reserves of which there are plenty.

Another way is the introduction of sanctions against Iran and how they are enforced with the US already seemingly backing down from there earlier threats for a blanket ban on countries buying oil from Iran while the sanctions are in place.

The Trump administration has now announced they will enforce the sanctions on a country by country basis which implies that some countries will be exempt.

“We are prepared to work with countries that are reducing their imports on a case-by-case basis,” said Brian Hook, the department’s director of policy and planning.

So how and when the US government will try to drive down oil prices is anyone’s guess but the chances of such a move happening is growing by the day.