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Daily Market Brief

Sterling resists Brexit, Equities consolidate


Sterling resists Brexit

By Vincent Mivelaz

The nomination of Boris Johnson as UK Prime Minister has clearly not been beneficent for Sterling (GBP/USD -3% since nomination), which has been falling consequently to tumble at decades low against major currencies. Furthermore, the recent drop in key economic releases, including long-awaited GDP figures for the second quarter have not been of great help. The newly elected PM is expected to face a no-confidence vote in an attempt to safeguard the UK from a hard Brexit when UK MPs will return from summer vacations on 3 September 2019. Meanwhile Irish governing liberal-conservative party Fine Gael confirms it is willing to maintain current backstop deal unscathed with the EU so that negotiations can go smoothly. Investors will look closely at UK labor data due on Tuesday as well as inflation the day after.

As suggested by the Bank of England monetary policy meeting from 1 August 2019, which decided to maintain its Bank Rate on hold at 0.75%, the economy is expected to grow less strongly, despite the BoE assumption of no Brexit shock, at 1.30% in 2019/2020 from prior 1.50% and 1.60% respectively, a significant shrinkage. The publication of 2Q GDP figures point to similar ends, with the year-on-year gauge given at 1.20% (prior: 1.80%) and quarter-on-quarter in contraction territory, declining by -0.20% (prior: 0.50%). June's indicators are also not very encouraging, with industrial production at -0.60% (prior: 0.50%), manufacturing production in a slump of -1.40% (prior: -0.20%) while trade balance improved (GBP -7 billion; prior: GBP -10.7 billion). Overall, despite optimism related to the UK MPs willingness to break PM Boris Johnson “do or die” pledge by either evict him or force a Brexit extension, it seems that the situation remains far from rosy in the country.

The recent rebound in GBP/USD, currently trading at March 1985 low, is about to turn as upcoming June labor and July inflation data should stay dull while trade war headlines will continue to be at center-stage. The pair is maintained within 1.2080 and 1.20 range.

Equities consolidate as trade ware worries linger, USD/CNY rises to 7.07

By Arnaud Masset

Risky assets started the week off in a modestly positive posture with equity future-index blinking green across the screen with several Asian markets closed for a holiday. Chinese equities were better bid with the CSI 300 rising 1.80% on the back of a slightly dovish 2Q monetary report from the PBoC. On Monday, the Chinese central bank set the USD/CNY exchange rate to 7.0211, up 0.11% from Friday. Released on Friday, the report suggests that the PBoC will maintain an accommodative monetary policy stance and added that “Policies will be preset or fine-tuned based on changing situations, and attention will be paid to stabilize and guide expectations”. The monetary institution also left the door wide open for further yuan depreciation should the economic situation; understand here: if the trade war with the US worsens.

Against such a backdrop, safe haven assets slid in negative territory. The yellow metal fell 0.33% to $1,492, while silver gave up 0.63% to $16.88. USD/JPY rose 0.27% in early European trading, up to 0.9752. Only the Japanese yen appreciated against the greenback with USD/JPY falling 0.30% to 105.37, which suggests that trade war negotiations are keep investors on their toes.
Looking at the economic calendar, it is going to be a busy week. UK June labour data are due for publication on Tuesday (unemployment rate expected flat at 3.8%), together with the German ZEW (expected at -6.3 versus -1.1 previous) and US CPI (headline expected at 1.7%, up from 1.6% in June and core measure stable at 2.1%). On Wednesday, the UK, Germany, France and Sweden will publish their inflation data for the month of July. On Thursday, the US will release July’s retail sales figures and industrial production gauge.

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