Original insights into market moving news

RANsquawk Week in Focus (week commencing 25 March 2019)


Even by Westminster’s standards, last week was a chaotic one for UK politics as PM May continued to face further headwinds in her battle to secure the nation’s departure from the EU. The PM was rocked in the early stages of last week after House Speaker Bercow’s decision to block MV3 on the basis that no changes had been made to the existing deal. As such, given the political stalemate, May had no choice but to go to the EU Council looking to secure an extension to Article 50. With a longer extension to Brexit seemingly impossible for the PM to request given the potential Brexiteer backlash from within her own party. As such, attention turned towards the likelihood of a shorter extension. PM May opted to seek for a delay until June 30th, however, this was met with a particularly divided response from the EU with some members of the Union concerned about the ramifications for EU elections which are due to take place on May 23rd. With this in mind, the EU summit final communique stated that EU leaders will give the UK an extension until May 22nd if HoC agrees to the deal next week, otherwise it will give the UK until April 12th to indicate a way forward if the deal is rejected, while the EU reiterated its stance that the WA cannot be renegotiated. As such, despite Speaker of the House Bercow’s decision last week to block MV3, pressure from the EU looks like he will have to inevitably reverse his position and offer UK lawmakers another opportunity to vote on May’s deal. That said, despite the severity of the situation, there is little to indicate that PM May will be able to overturn the 149 vote defeat she suffered last time around. On both sides of the argument, Brexiteers have little incentive to back her plan and instead are likely to be more inclined to sit on their hands as the prospect of a no deal comes ever-closer (albeit the prospect of an eventual longer extension could lead to a revision of this position). From a remain perspective, with Opposition Leader Corbyn meeting this week with EU counterparts, some in Parliament are looking to force a series of indicative votes in an attempt to find an alternative to the current deal. That said, it still remains unclear what, if anything, would be able to secure a majority in the HoC. Furthermore, any plan would have to be accepted by the EU (who have already stated they are not up for a renegotiation) with previous Brexit plans put forward by Corbyn been critiqued as ‘trying to leave the EU whilst retaining all the benefits of EU membership’. Nonetheless, Steven Swinford of the Telegraph surmises MPs plans to ‘take control of Brexit as follows: 1) Letwin amendment enables backbenchers to take control of Parliamentary business, 2) MPs vote on it on Monday. Expect almighty row as Remain ministers demand free vote, 3) Indicative votes Weds - Common Market 2.0, 2nd ref, CU among motions. Whatever the outcome, expect UK assets to continue to be dominated by events in Westminster.


US Treasury Secretary Mnuchin and USTR Lighthizer will visit Beijing at the end of next week for further trade talks. The language from the Trump administration remains constructive, with the President on Friday stating that a trade deal was close. Following the US delegation’s visit to Beijing, China’s Vice Premier Liu He will travel to Washington in April to conclude negotiations, China’s MOFCOM said. Trump has this week threatened to keep tariffs on China long after a trade deal, as he wants to see evidence that the Chinese are playing fair, and any deal is enforced sufficiently: “We’re not talking about removing them, we’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China that China lives by the deal,” Trump said this week; the Chinese have reportedly wanted the tariffs to be lifted immediately; the China Global Times editor, often seen as a mouth piece for the Chinese state, said China would not accept the US keeping tariffs on, while China has removed them, saying that it leaves China with no option to “hit back.” Bloomberg reported that the goal was to reach an agreement in the days after Liu He’s visit, potentially capped-off with a meeting between Trump/Xi at Mar-a-Lago. While a lot of the news flow tends to focus on the more challenging aspects of the talks, Politico reported that a China deal remains very close and the Beijing trip next week is largely ceremonial, in order for China feel they are being respected by an equal amount of visits, and a deal is still planned to be signed off by Trump and Xi and Mar-a-Lago at the end of April.


On Monday Apple (AAPL) is widely expected to unveil its video streaming service that places the tech giant in direct competition with market leader Netflix (NFLX). Pricing is not yet known; A USD 9.99/month Apple News Service will also likely be announced, another branch out into the media sector; but not all news sites are on board as Apple wants 50% of all subscription revenue. Magazine publishers, however, are embracing Apple's plan, MacRumors reported. Following the announcement of new iPads, iMacs and AirPods in the weeks running up to the event, it is unlikely any new hardware will be announced, although new Apple Pay features are expected to be unveiled, including partnerships for a credit scheme with Goldman Sachs.  Analysts at JPMorgan expect the event to lack any “catalyst” in regard to influence on the share price, where they cite pre-announced products and pre-set expectations taking away the chances of any surprises.


The Reserve Bank will likely hold its Overnight Cash Rate at the record low 1.75%. Capital Economics thinks that the central bank will also likely maintain is neutral stance following the soft GDP report this week. Q4 growth was 0.6% QQ, short of the 0.8% QQ forecast the RBNZ had pencilled in, but up from the 0.3% in Q3. "Growth continues to be driven by solid consumer spending which lifted 1.3% in the fourth quarter," CapEco says, "annualised GDP growth in the second half of 2018 was just 1.7%, and that should mean that the RBNZ holds its neutral stance and reiterates that it will 'keep the OCR at an expansionary level for a considerable period'." Additionally, the tight labour market will compel the Reserve Bank to avoid cutting rates; CapEco explains "While slowing GDP growth is consistent with slower employment growth, much of this easing has already taken place," and "any further easing in employment growth would likely just offset the slowdown in the growth of the labour force as net migration continues to ease." And along with a new minimum wages, labour compensation should tick up, in the months ahead, which may see businesses raise prices to cover the rising wage costs. CapEco sees the RBNZ on hold until late 2021 - while that's roughly in line with financial market forecasts over 2019, Capital Economics points out that it is still more subdued than the analyst consensus, which foresees a 25 basis point hike by the end of 2020.


Following two straight monthly declines of 0.1% MM, RBC expects Canadian GDP growth of +0.1% MM in January. "Solid manufacturing and wholesale sales reports provide some anchoring for this, while residential construction also looks to have risen in the month," the bank writes, "the overall gain is despite an assumed 8% decline in oil/gas production in the first month of Alberta's mandated oil production cuts." RBC continues to track Q1 GDP growth at 0.9% annualized, which the bank observes would make it the second straight sub-1% quarter. But looking ahead, the bank anticipates a pick-up starting in Q2, where it has pencilled in an estimate of +2.1%.


The South African Reserve Bank will likely keep rates unchanged at 6.75% on Thursday. Low realised inflation and the dovish pivot of global central banks could result in the SARB downwardly revising its repo forecasts, SocGen thinks, but says that the ZAR would imply a need to deliver interest rate hikes later during the year in order to contain the second-round effects of the currency's weakening. Also of note for South Africa next week is the rating review of Moody's on Friday, with some expecting a downgrade to be in the offing. SocGen does not believe the CRA will downgrade south Africa, but still expects he outlook to be placed on negative watch. "Economic growth is struggling to revive, unemployment is massive, the 2019/20 budget has delivered an increase in deficit and debt trajectories, and Eskom will likely be a drag on confidence and fiscal performance in both the short and long term," the bank writes, and in its view, "the move will not cause any major reaction in South Africa's markets, but should nevertheless support our bearish ZAR view with a target at 15.25." SocGen also adds that a downgrade by Moody's would hinge on election results (8 May) and the strength of President Ramaphosa's mandate to deliver reforms.


Mexico's central bank will likely leave rates unchanged at 8.25% on Thursday. However, looking ahead, SocGen expects the Banxico to begin easing policy later in the year. "Our medium-term growth and near-term inflation forecasts are lower than consensus, leading us to expect more rate cuts this year than consensus," SocGen writes. The bank notes that the inflation outlook has improved, with both the headline and core measures likely to fall sharply in the second half of the year. "This should prompt Banxico to begin easing in Q2 2019," SocGen says, and "additionally, given our view on the Fed's stance, we expect significant rate cuts in Mexico over the next couple of years," with the bank pencilling in 100bps of cuts this year, and 150bps of cuts next 2020.