Michael Addis

Market Commentary

For the week ending 24 August 2018
Report by Michael Addis
Back to Latest
Michael Addis

Sterling staged a small recovery against the US Dollar this week, with positive UK data and a confident tone around Brexit negotiations, combined with negative news for US President Donald Trump.

At the start of the week, the “current” Brexit Secretary Dominic Raab, said he was confident about striking a deal with the European Union (EU), ahead of talks with the EU’s Chief Negotiator Michel Barnier. At the same time, the UK Government highlighted that preparations were being stepped up in case of a “no-deal” outcome by next March. This served to focus minds on the implications of a “no-deal” scenario, although Mr Barnier responded by saying “The EU will not be impressed by a blame game and everyone should understand that”.

On Tuesday, the Office for National Statistics revealed that the UK Budget surplus amounted to £2billion in July. This was significantly higher than the £1.1billion surplus predicted by analysts and the highest July surplus since 2000, supported by record employment and reasonable consumer spending. The deficit in the current financial year, which started in April, was £12.8billion, 40 percent below the same period last year. This leaves the Chancellor, Philip Hammond, some flexibility to increase spending at November’s Budget, although he already needs to provision for a promised £20billion per year rise in National Health Service spending. However, Mr Hammond immediately dampened expectations of a fiscal giveaway, tweeting “We can’t be complacent, we must keep debt falling to build a stronger economy and secure a brighter future for the next generation”.

The US Dollar was on the back foot after Mr Trump was reported as saying he was “not thrilled” about the Federal Reserve’s (Fed) decisions to raise interest rates this year and raised doubts about Fed Chairman, Jay Powell, whom he placed in charge. Mr Trump said his advisers told him last year that Mr Powell would support “cheap money” as the Fed’s Chairman, and then Mr Powell surprised him by moving ahead with rate increases, which the President fears will cool the US economy. With Mr Trump becoming increasingly vocal on the matter, this could result in clashes between the White House and the Fed, potentially reducing the path of short-term interest rates and in turn, the attraction of the US Dollar for overseas investors. The Fed has raised interest rates seven times since 2015 and a further two increases are currently expected in 2018.

Mr Trump also decided to have a pop at the EU this week. Having previously made great virtue of a potential free trade agreement between the US and EU, he threatened to slap a 25% tariff on every car imported into the US from the EU, whilst also reiterating prior trade-related threats against the EU.

The tables then turned, when the President’s former lawyer Michael Cohen said, as part of a guilty plea in federal court, that the President directed him to buy the silence of two women during his 2016 election campaign, so their allegations about affairs with Mr Trump would not harm his presidential bid. Having accused Mr Cohen of lying, Mr Trump then said he became aware of the payments to the women “later on”. Mr Trump said that the payments came from him, not from money raised to finance his campaign. “My first question, when I heard about it, was, ‘Did they come out of the campaign,’ because that could be a little dicey. And they didn’t come out of the campaign, and that’s big”, he said. Just how big this turns out to be remains to be seen!

Ending on a positive note, the US equity market set a new record this week for the longest period of rising prices without a 20 percent drop, which is usually associated with a bear market. By close of business on Wednesday, the duration of the US equity market rally hit 3,453 days, from March 2009, following the near collapse of the global financial system in 2008, exceeding the 1990-2000 bull run. Clearly the market is not currently concerned by the rising, largely Trump induced tensions, which could suggest that choppier times lie ahead.