Tillerson, Hammond, Draghi - This Morning's Markets

Trump stole his thunder! As the chancellor was speaking the news broke that US Secretary of State Rex Tillerson had been sacked and replaced with former CIA Director Mike Pompeo. The move shows that no0t only is it America first, but his protectionism runs deeper, and we must ask is the timing of this important, after Tillerson’s comments on the Salisbury Spy attack.

GBPUSD moved higher, and adding both the Chancellor’s performance and Tillerson’s sacking to the mix we have seen some very strong gains with cable up trading through the key upside trendline I had highlighted on my twitter feed yesterday morning. This was initially a pound move however it soon became much more apparent that the downside on the US dollar was having much more of an effect, with EURUSD, USDJPY and Gold prices all posting similar moves.

Lets focus on the UK, and the Chancellors big moment for just a second, and why did we see the market take his statement without any skepticism, after all Brexit could derail all of these plans. So calling an upward revision to GDP is a bit of a stab in the dark. What did the chancellor tell us:

  • The Budget deficit is shrinking between 2018 and 2023 it is now expected to shrink from GBP213BN to GBP192BN.

  • A raise in the economic growth forecast with the UK now expected to grow by 1.5% in 2018 vs the 1.4% expected.

They were probably the main headlines that really drove the markets, and there was next to no mention of the “B” word! Although there was an estimate on the Brexit financial settlement, with the government believing it to come in at around GBP37BN. However, despite not really touching on the subject, the uncertainty that Brexit creates cannot be overlooked. We know that the Brexit factor is already influencing productivity and there is no way the chancellor can rule out Brexit totally changing his numbers at any given point. For me that’s why the markets decided the US dollar/Tillerson story was the one to get their teeth into.

As mentioned earlier, the Tillerson issue is not maybe a surprise, we are already looking at the highest turnover of staff in a White House for decades. However, is the willingness to fire high ranking officials and politicians if they don’t toe the party (Trump’s) line. The sacking of Rex Tillerson as Secretary of State comes just a matter of weeks after Gary Cohn, the President’s high ranking economic advisor left his post. The market has shown far more resilience over this time over, probably because this is the same old story when it comes to the Trump administration.

Draghi Headlines

  • Inflation on track

  • APP remains necessary

  • Inflation adjustment would end QE

  • Must be patient on policy

After the moves on the greenback yesterday, this morning has seen Mario Draghi undo some of the work on EURUSD with the pair falling lower after the ECB president was a little clearer on some points. Inflation was the main point he made saying that stronger CPI adjustment would be a reason to end the QE, but of course reiterated that patience is the key when it comes to the monetary policy.

He may have been a clearer but of course there was very little here that we didn’t already know, especially around the inflation situation, and the patience we must all have over policy. Really the moves were not really Euro moves, rather a spate of US dollar buying that has lead both GBPUSD and EURUSD lower and USDJPY higher.

Stocks ended lower overnight as the Tillerson/Pompeo news continued to rattle investors. The expectations are that the trade wars could now intensify as we expect the US to be much tougher on its foreign policy going forward. Fears are now circling about the future of Treasury Secretary Steve Mnuchin, however this seems like a knee jerk reaction.

With Draghi this morning, it will be a case of hanging on for the US retail sales later this afternoon. The February reading could see the number jump to 0.3%, a stark improvement from the -0.3% print for January. Vehicle sales however do seem to be slowing and falling gas prices could show up in this month’s number.

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