Good morning,
Terrorism threat lingers over sterling
Sterling was volatile within its recent range yesterday and finds itself below 1.30 against the USD and a little above 1.16 versus the euro this morning. News that the Joint Terrorism Analysis Centre and MI5 had lifted the threat level in the UK to its highest level of ‘critical’ symbolising the belief that further attacks are ‘imminent’ caused a slight wobble in sterling later in the day. The military will be seen on the streets with soldiers also likely to be guarding large events such as concerts and sporting events.
The electoral campaigns remain suspended for now but hints have suggested that they could restart by Friday. Economic news was largely glossed over but tax receipts in the UK economy fell in April according to the latest numbers from the UK budget while retail sales fell by the most in one month since 2012. Easter was of course in March so some volatility is expected in the month to month readings but the retail sector remains a sharp focus for those that believe that Brexit will bring more pain to the UK economy in the coming quarters.
Moody’s chips China
The main news overnight has been a downgrade to China’s debt pile for the first time since 1989. The ratings agency took action over fears over the amount of debt within the economy and the burden that will mean for the finances of the 2nd largest economy in the world. “Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage,” the rating agency said in a statement. “The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”
The lack of international investment in Chinese debt makes this less of an issue than say a downgrade to Japan, the US or the UK but the wider question remains of how does a country that has expanded so quickly and become used to such exponential growth, delever itself in a way that does not cause concerns over financial stability?
The AUD as a proxy for all matters Chinese was the main mover overnight although only by around 0.5%. The CNY declined by the most in a fortnight but that was only 0.06%.
European data strength continues
As predicted yesterday’s data from the Eurozone continued its recent resurgence, bolstering the single currency. Strong and consistent PMI releases around 55.0 are a good indicator of near-term growth and the German IFO survey of business confidence hit its highest level in 2 years. The moving of political risk away from Europe (two elections done, little for the populists to celebrate and a strengthening level of solidarity towards the Brexit negotiations) to the United States (persistent delays to the Trump reform agenda as well as further allegations of criminal activity).
The Day Ahead
Most of the market data focus will fall on the European Central Bank and the Federal Reserve today with Mario Draghi due to speak in Madrid this afternoon and the minutes of the latest Fed meeting released this evening. We will be looking to see whether Draghi responds to the recent calls by Angela Merkel around the weakness of the euro and questions over the central banks loose monetary policy.
Similarly we will be watching the notes from Washington for clues as to the Committee’s views on the stability of inflation, whether the dip in Q1 growth was just that and whether it is prudent to start unwinding some of its balance sheet that swelled under the multiple quantitative easing programs.
Have a great day.