Business

Brexit and US politics take focus this week

President-elect Donald Trump speaks during a news conference in the lobby of Trump Tower in New York
President-elect Donald Trump speaks during a news conference in the lobby of Trump Tower in New York President-elect Donald Trump speaks during a news conference in the lobby of Trump Tower in New York

THE optimistic disposition on markets that had carried over from the end of 2016 into the opening days of 2017 came under some pressure last week.

There was increased volatility on both equity and currency markets. Indeed, equity markets were heading into the weekend nursing modest losses, while both the dollar and sterling experienced some weakness in recent days. As a result, the euro managed to trade higher, regaining the $1.06 level versus the dollar and trading near 88p against sterling.

One source of this increased volatility was the market reaction to the US President-elect’s first press conference. There were no major expectations in the lead up to the event that we would get much in the way of details of his much touted expansionary fiscal policy stance. Nonetheless, the lack of meaningful reference to the future direction/scope of fiscal policy, combined with the divisive nature of the press conference, served to weigh on risk appetite and the dollar.

Meanwhile, sterling continued to be hampered by Brexit, with concerns being raised about the uncertainty over the UK’s negotiating strategy and risk of a ‘hard’ exit from the EU.

Some of the focus for the week ahead will shift to the eurozone, with the ECB Council meeting. While markets do not anticipate the Governing Council will make any policy changes, having only announced an extension to its QE programme in December, the meeting statement and President Mario Draghi’s press conference will still warrant attention.

The ‘account’ of the December meeting showed diverging views on the appropriate ECB policy stance. It noted that “a few members” of the Committee did not support the proposal to extend QE, instead preferring to end purchases. Markets will also be looking for updated views on inflation, as well as the wider Eurozone economy following a run of very encouraging data recently. Overall though, the ECB is likely to remain dovish in tone, reemphasising its willingness to do more, if required, to return inflation to its target of just below 2 per cent.

Meanwhile, there is a busy schedule of data releases in the UK. Most of the focus will be on the latest raft of labour market figures, after data for the three months to October showed a weakening jobs market (employment fell for first time since Q2’15). The unemployment rate is anticipated to edge up to 4.9 per cent in November, while the timelier claimant count is expected to rise for a fifth consecutive month in December. Meantime, average earnings growth looks set to remain subdued.

However, despite the somewhat softer labour market data, UK retail sales are forecast to continue to improve in December. This backs up other data which indicate that the UK economy continued to grow at a health pace in Q4. Although, CPI inflation looks set to rise further (forecast at 1.4 per cent) in December. Rising prices may soon begin to temper the performance of the consumer side of the economy. In terms of Brexit, a major speech on the issue by the Prime Minster, Theresa May, today, will garner significant attention.

In the US, industrial output is forecast to have rebounded in December, following November’s decline. The NY and Philly Fed indices for January are predicted to remain consistent with only modest growth. The US schedule also features a number of updates from the property market, including housing starts for December, which are expected to show some recovery after falling in November. Meantime, CPI inflation is expected to increase to 2.1 per cent, although the Fed’s preferred core-PCE measure remains pinned down around 1.6 to 1.7 per cent.