LONDON (Reuters) – 1/ROAD TO NO. 10
Investors will wake on July 24 to a new British prime minister. Boris Johnson, the face of the Leave campaign in the 2016 Brexit referendum, is — if betting markets are to be believed — almost certain to capture the majority of Conservative Party members’ votes and become the new leader, beating foreign minister Jeremy Hunt into second place to succeed Theresa May.
Sterling has sunk to its lowest in 27 months as the two candidates tried to outdo each other with hard Brexit rhetoric, including pledges to leave the EU with or without a transition trade deal, come the Oct. 31 deadline.
There is a view that once in power, the new prime minister will tone down the rhetoric and begin renegotiating an arrangement with Brussels. UK lawmakers have also backed a plan to make it tougher for the government to force a no-deal Brexit.
But Johnson may have boxed himself into a corner with his promises so investors are bracing for more sterling pain – they expect a sharp rise in volatility in the currency around Oct. 31. Banks warn of a pound at or near parity with the euro and dollar should a no-deal Brexit come to pass.
Voting in the leadership race concludes on Sunday, results are expected on Tuesday and a new prime minister should be in place by the end of the week.
(For a graphic on ‘Pound volatility curve’ click https://tmsnrt.rs/32zVz4v)
2/LOWER FOR EVER?
Just seven months after ending a three-year long bond-buying program, the ECB is expected to signal at its Thursday meeting that an interest rate cut is imminent to boost stubbornly low inflation.
Already, on June 18, ECB boss Mario Draghi stunned investors by flagging a return to stimulus. Money markets have moved swiftly since then to price a roughly 60% chance of a 10 basis-point cut at the July 25 meeting. A September cut is considered a done deal. Commerzbank (DE:) even predicts a 20 bps cut this month. Some argue that moving before the U.S. Fed cuts rates on July 31 would prevent the euro rising against the dollar.
How low could the ECB go? Talk is swirling that the bank may tweak the way it targets inflation, enabling it to cut rates more and keep them low even if inflation goes above target. And of course, investors will be listening out for any hint that the ECB will resume bond-buying and if so, when.
(For a graphic on ‘#Euroboom days over?’ click https://tmsnrt.rs/2O05QUf)
Purchasing Managers’ Indexes (PMI), generally reliable gauges of economic trends, have been painting a pretty gloomy picture in recent months. So advance July PMI readings for Japan, the euro zone and the United States, due July 24, will be of particular interest, given the bets on monetary easing in all three countries.
PMIs so far show a lot of manufacturing gloom while pointing to relatively robust services activity. In the euro zone, services PMIs came in at 53.6 in June, versus a 48.5 reading for manufacturing. Similarly U.S. factory activity barely grew last month, while services stayed above the 50-mark.
The worry now is that manufacturing weakness will start to seep into services, dealing a further blow to growth. Currently, JP Morgan’s global composite PMI index is holding just above 50 – the mark denoting economic expansion – while a new orders PMI fell under 50 in May for the first time since 2012.
If July PMIs show the composite gauge dipping into contraction territory, it would confirm that economies are indeed in need of policy stimulus.
(For a graphic on ‘Global composite PMIs’ click https://tmsnrt.rs/2O4T5Yz)
4/SHARPER FOCUS ON FAANGS
Netflix (NASDAQ:) kicked off earnings for FAANG stocks on a bleak note. Shares of the video-streaming service swooned 10.2 % after it reported its first U.S. subscriber drop in eight years.
Of course it doesn’t mean shares of Facebook (NASDAQ:), Amazon (NASDAQ:) and Google-parent Alphabet (NASDAQ:) will do the same when they report their result over coming days. But it’s a worry, since FAANGs’ earnings and their shares have been crucial contributors to record-breaking Wall Street rallies this year and last.
The Netflix nosedive weighed on the group. Even so, it is up 21% this year, exceeding the roughly 19% gain in the S&P 500, though it lags its fellow FAANGs, except for Alphabet.
Facebook, which reports on Wednesday, has enjoyed a 50%-plus share surge so far in 2019. But the shares have fallen in recent days amid calls for greater regulation of the company’s handling of private information. It’s also under fire in Washington for its plan to launch a cryptocurrency, Libra.
Alphabet releases results on Thursday. Politicians are calling for it too to be more regulated, capping its year-to-date gain at 8.5%. Amazon, up about 30% in 2019, reports the same day amid worries that rivals Walmart (NYSE:) and Target (NYSE:) are getting more competitive with online sales and deliveries.
The fifth FAANG, Apple (NASDAQ:), opens its books on July 30. By then the effect on market sentiment should be clear.
(For a graphic on ‘Netflix and FAANGs’ click https://tmsnrt.rs/32rV6kK)
5/THE DOVE FROM ABOVE
On July 25, Turkey’s central bank meets for the first time since President Tayyip Erdogan sacked its former head for not moving fast enough on cutting interest rates, now at 24 percent.
No prizes then for predicting that new governor Murat Uysal will deliver a rate cut on Thursday, the only question being by how much. Money markets are pricing in at least 300 basis points, while a Reuters poll of economists reckons 250 bps. Consensus: the only way is down.
Given the lira only recently stabilized from last year’s 30 percent dive, a rate cut would raise the risk of the currency buckling again. There is one difference now, however: almost every central bank in the world, from the United States to Ukraine, is limbering up to cut rates. So for once Turkey won’t stand out.
And on top of that U.S. President Donald Trump doesn’t seem to be in any rush to sanction Turkey for buying Russia’s S400 missile defense system. But a week can prove a long time in politics.
(For a graphic on ‘Turkey has been flying since May’ click https://tmsnrt.rs/32Bh1Gn)