Johnson’s motives questioned amid continuing row

Sterling fell yesterday as the market considered the effect of the proroguing of Parliament and the likelihood of a No-Deal Brexit.

With Parliament unlikely to have enough time to debate the discussions that have taken place between London and Brussels since Boris Johnson became Prime Minister, it would be quite a leap of faith to believe that a deal can be completed by October 31st. That has led the main Opposition Parties to investigate how they can have the proroguing of Parliament declared illegal.

The argument that the suspension of Parliament is unconstitutional appears weak since there are several other instances where this has taken place, although this would be the longest suspension in history, it is hard to believe the reasons that have been put forward.

However, the fact remains that as things stand, Parliament will reconvene on September 3rd and then be suspended from around September 12th until October 15th. The longer it goes without any affirmative action taking place the less likely it is that the dissenting MPs and members of the public will be able to reverse the decision.

Discussions (these are still not negotiations) appear to be continuing between London and Brussels with the Prime Minister’s team frantically putting together their ideas for an alternative to the Backstop which is the cornerstone of the rejection of Parliament of the Withdrawal Agreement negotiated by Theresa May.

The pound fell to a low of 1.2172 against the dollar yesterday and closed at 1.2182. Versus the euro, it remained above the 1.1000 level touching 1.0995 but closing at 1.1018.

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Tit-for-tat gets the U.S. & China nowhere; now for more talks

The announcement that trade talks between Washington and Beijing are set to resume did little for global risk appetite as traders continue to be sceptical that an agreement can ever be reached. The fundamental disagreements between the two nations are so wide and without room for compromise that it is almost accepted that no matter how long talks continue for there will always be a stalemate.

With the 2020 election campaigns about to start in earnest, President Trump is expected to be even more aggressive in his stance on several issues, particularly, “making America great again”, the economy, law and order and immigration.

Next week, the economy will come into focus again with the release of the employment report for August next Friday. Early estimates are for a slightly lower headline of around +150k new jobs created. Wage inflation remains above 3% well in excess of consumer prices. Last month’s 3.2% is expected to be matched again although there some analysts expecting a slight deterioration.

Activity data will also be released next week with the economy continuing to expand although at a lower rate. ISM manufacturing is likely to remain at around 51.2, while factory orders are expected to be a little weaker.
Any further signs of a slowdown will attract the attention of the Administration with Trump likely to call on the Federal Reserve to act at its meeting in a few weeks’ time.

Yesterday, the dollar index rose to a high of 98.55 and closed at 98.45. It remains in a broad 97.80/98.80 range as it awaits further clarity from the Fed and positive news on trade talks.

Euro remains on a downward path

There is little to commend investors to the Eurozone currently. The economy remains in the doldrums, political unrest never seems far below the surface and neither the EU Council nor ECB seems unable to arrest the slide towards recession.

Recent data has at least shown the economy is bottoming out. Analysts remain concerned about the lack of activity to try to create demand with the ECB seemingly content to simply wait things out.

The entire Eurozone was designed to create an almost self-sufficient region where intra-state trade was able to sustain the economy despite global shocks. This has patently failed as demand within the region has slowed as the global economy begins to falter.

Next week, further activity data will be released. It is expected to show that stagnation rather than further deterioration has set in.

Monday sees the release of the Markit report on manufacturing with a slight fall to 46.7 from last month’s 47 expected. Producer prices, which will be released on Tuesday, are expected to have fallen in July by 0.3%, leading to a year on year increase of just 0.8%. This is a leading indicator of the lack of any inflationary pressures within the economy going forward.

Next Friday the latest release of Eurozone GDP will be published. It is expected to show that the economy grew by 0.2% in Q2 leading to a year on year figure of 1.1%. With activity still weak, a contraction in Q3 is still expected with Q4 then confirming a recession.

There is some cause for optimism down the road, with rumours that Germany is about to cut taxes to spur domestic activity and the ECB planning new measures when it meets later in September.

Yesterday, the single currency fell versus the dollar to a low of 1.1042, closing at 1.1057.