Political news may or may not overwhelm the economics, depending on where equities go

Outlook:

Markets are beset and beleaguered by political crises—Italy vs. the EC, Ukraine vs. Russia, UK leadership vs. Parliament, US vs. Mexico, and US vs. China. Any or all of these can blow up this week. Lurking in the bushes are upcoming House investigations into whether (or by how much) Trump has personally profited from the Saudi Arabia whitewash and deals, real or pending, with Russia.

Market players dislike political turmoil and despite the US being at the center of some of these, the dollar is the beneficiary as the safe-haven. (Note that our USD/CHF signal is going haywire and fast). It's hard to say which conflict will have the most lasting impact over time. Italy, probably. But the Brexit story is powerful, too, with a strong possibility of Parliament rejecting the deal. There's just no way sterling can come out of this at a higher level, even if May pulls a rabbit out of the hat.

May is giving too much away, according to some. The big one was agreeing to rules and regulations over which the UK will have no say, utterly violating the key principle of Brexit. The latest gift was Gibraltar, now excluded from the agreement and its fate to be determined by separate talks between Spain and the UK. Gibraltar wants to stay in the EU. Assuming Parliament rejects the deal, as is likely with Labour and the Irish DUP already against it, then what? Support for another referendum is growing, despite being nixed by May long ago, and surveys indicate Brexit would be rejected in a second round. Can May just announce another referendum without approval from anyone else? How this happens is not known. The third alternative ending is exit without a deal and without terms and conditions for a transition period after end-March 2019.

This forms a backdrop to hard economic data, which this week includes GDP, trade and the personal consumption data the Fed uses. The political news may or may not overwhelm the economics, depending on where equities go. A recovery in stock markets has the power to downgrade data or at least make it appear in the different light, much as we hate to admit it. If GDP is faltering and at the same time the stock market falls some more, the data can be seen as bad. If the data is dismal but the stock market is recovering, the data will be seen as less dismal and maybe even a Good Thing, because it might be considered to imply the Fed will slow down or postpone next year's hikes.

One thing we feel relatively certain about—the Italian opera is nowhere near the end of the First Act. We don't believe a compromise is going to come about. The EC is too arrogant and the Italians are too stubborn. Or maybe the EC is too stubborn and the Italians are too arrogant. Whichever way you look at it, the end is not in sight, as is the case with Brexit. Three guesses what benefits.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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