Race to be new Conservative leader takes shape

Former Foreign Secretary, Boris Johnson‘s lead in the race to be the new leader of the Conservative Party and Prime Minister was emphatically confirmed yesterday as he picked up more than 30% of the votes in the first ballot.

With three candidates failing to poll enough votes to remain in the race, next Tuesday’s second ballot will be contested by seven hopefuls. The race now seems to be for who will challenge Mr Johnson in the final ballot which is opened to the entire membership of the Party.

With four of the remaining candidates failing to reach the minimum number required to survive the next vote, where a minimum of 32 ballots is needed, there could still be one or two candidates who “fall on their swords”.

It is very likely that Johnson will face off against either Michael Gove who is still under a cloud over his drug use admission or Jeremy Hunt who is seen as a “safe pair of hands” but could struggle to unite the Party sufficiently to win a General Election.

While the Leadership campaign will continue to hold the attention of the markets, next week sees the release of inflation and retail sales data as well as a Bank of England Monetary Policy Committee meeting. Inflation is starting to pick up again and is above the Government’s target.This may attract the attention of the Central Bank although there is little chance of a rate hike even being discussed before Brexit is settled.

Yesterday, the pound remained in a narrow band trading between 1.2708 and 1.2662 versus the dollar. It closed marginally lower on the day at 1.2673. Versus the euro, it remains pressured but closed yesterday just one pip below its open at1.1239.

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Greenback awaits Powell’s rate hike observations

The financial markets remain unsure about the strength, or otherwise, of the U.S. economy.

Analysts have been continually told by Fed Chairman Jerome Powell that since they see the same data as the Fed., just maybe not in such a timely fashion, that they should make their own minds up and not rely on the FOMC for advance guidance.

The FOMC will meet next week to discuss short-term rates and Powell is unlikely to move far from his recent rhetoric in his post-meeting press conference.

There are certain words and nuances that analysts listen out for as “coded” signals as to the Fed’s intentions towards rates, but Powell mostly eschews such wordplay preferring, unusually for a lawyer, to provide the market with an honest opinion without overplaying his hand.

The Fed won’t cut next week but it does appear almost certain now that there will be a cut before the end of the next quarter. It remains to be seen whether that will be a one-off to “steady the ship” or the start of a series of moves required to provide enough stimulus to ensure GDP remains at or close to 3%.

Following a series of hikes last year, the Fed is now in a strong position to act by leaning gently on the accelerator to promote growth particularly since inflation remains benign.

The dollar is reacting more to global events than the domestic scenario following yesterday’s events in the Persian Gulf which pushed the oil price up by close to 5%. Risk appetite may suffer should there be an escalation and that would provide further strength to the currency.

The dollar index remained in a narrow range yesterday, it rose to a high of 97.08, closing at 97.04.

Market concerns over euro longevity growing

Faced with an economy which is suffering possibly caused primarily by systemic issues, the infighting which has been highlighted by Rome’s failure to comply with Brussels’ and the rise in nationalism in France questions are starting to be asked about the long-term viability of the entire Eurozone.

The region requires, if not a complete fiscal union, then certainly a greater degree of cooperation. It seems that the major economies use their own fiscal independence as the only tool they have to affect their economies.

The budgetary constraints Brussels is trying to place upon Rome are barely holding and are likely to fall apart as next year’s budget shows an increase on the 2.4% deficit that is already in place.

With Brussels demanding that Rome brings its finances back in line, the support that the more radical coalition Party received in the recent elections has provided League with the strength to threaten Italy’s continued membership of the euro.

This is a major concern to Brussels. Not only would Italy’s departure damage the credibility of the entire project, but it may lead to further nationalist-leaning factions to push for their own country’s independence. Obviously, Brexit is being viewed with interest although since the UK is not part of the Eurozone, its departure hits the EU’s budget rather than its future financial plans but how the UK fares outside of Brussels safety net will exercise nationalist minds.

The region continues to see benign inflation as evidenced by Germany’s release of May CPI yesterday. Prices rose in line with expectation by 0.3% MoM, leading to an unchanged YoY rise of 1.4%.

The single currency is finding some support at recent lows, reaching 1.1268 versus the dollar yesterday, closing at 1.1275.