Markets Continue to Kick the Can Down the Road

Fundamental analysis of Forex market

The main market theme of ‘kicking the can’ down the road continues. The likely Brexit delay will not be solving the underlying problem any time soon.

The UK and the EU have agreed a “flexible extension” of Brexit until 31 October. EC President Donald Tusk has urged the UK to “not waste this time” and said the extension could be terminated if a withdrawal deal is agreed. The PM said the UK would still aim to leave the EU as soon as possible.

Even central banks, too, are helping with this kicking the can solution with easing of monetary policy, from the dovish Fed to the ECB using a negative interest-rate policy and targeted longer-term refinancing operations to help.

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Equities are waiting for earnings season to kick off in earnest Friday with JPMorgan Chase & Co. and Wells Fargo & Co. releasing Q1 results. It should give the market a first glimpse at how the Fed’s cautious shift on monetary policy affected the biggest U.S banks at the start of the year.

IMF downgrades 2019 growth forecast

In its latest World Economic Outlook report this week, the IMF trimmed its 2019 global growth forecast to +3.3% from +3.5% in its previous report in January. That would be the weakest growth rate in a decade and the most recent downgrade is the third in six-months.

Trump takes the trade war to Europe

In another of his tweets, US President Trump highlighted that the WTO found EU subsidies to Airbus have adversely impacted the US, to the tune of +$11B. As a result, he threatened to impose tariffs on +$11B worth of EU goods.

In Europe, an EU-China summit this week was meant to boost cooperation, especially against Trump’s controversial policies. Instead, it highlighted the differences, led by growing trade tensions. Europe pressed China on unfulfilled promises. China agreed with the EU to end forced technology transfers and strengthen international rules on industrial subsidies. But, will they deliver?

On the Sino-U.S trade front there has been “little change” with ongoing dialogue continuing in the background. However, the two countries have “pretty much” agreed to open enforcement offices that will ensure each party sticks to the terms of said deal, when it comes.

Central banks

As expected, the ECB left the 7-Day main refinancing rate unchanged at +0.00%, while maintaining its forward guidance on rates. It also left its Deposit Facility Rate at -0.40% (as expected) and left the Marginal Lending Facility at 0.25% (as expected).

In its following statement, it reiterated its forward guidance that interest rates to “remain at their present levels at least through end of 2019 and for as long as necessary to ensure sustained convergence of inflation towards target.” Also, reiterated to reinvest QE debt for extended time after first rate hike. They made no reference to TLTRO’s in their policy decision.

Hungary Central Bank (MNB) March minutes showed that the decision to raise deposit rate by +10 bps was unanimous and reiterated that future steps to depend on findings of CPI reports. They expect to adopt a cautious approach as inflation development are “ambivalent.”

US inflation data

U.S consumer prices rose last month, driven by a rise in volatile oil prices. The CPI increased +0.41% in March. Ex-food and energy categories, core-prices rose just +0.15% from February.

Fed Governor Powell said what he sees is “inflation that’s close to +2%, but that sort of keeps bumping up against +2% and then maybe moving back down a little bit.” He does not “feel that we have kind of convincingly achieved our +2% mandate in a symmetrical way.”

On the Economic Calendar, no releases are scheduled for this weekend.

Market concerns:

  • New trade war fronts opening up US/EU, US/USMCA, US/MEXICO
  • U.K/Brexit fallout
  • US-China trade deal – details may emerge
  • Trans-Atlantic trade tensions to intensify
  • OPEC, Saudis, Venezuela & Trump
  • Venezuela/Russia/U.S tension
  • Geo-political concerns in Russia, Ukraine & France
  • India/Pakistan – tension remains high amongst two nuclear nations
  • U.S ramps up trade talks with India and Turkey
  • ‘Twitter Trump’
  • Spanish snap elections expected to be full of surprises April 28

Next week: CAD BoC business outlook index, AUD monetary policy minutes & CNY GDP (Apr 15), GBP average earnings & NZD CPI (Apr 16), GBP & CAD CPI, CAD Trade, AUD employment (Apr 17), GBP, CAD & USD retail sales, NZD & AUD Bank holiday & AUD parliamentary elections (Apr 18), Bank holiday CHF, EUR, GBP & CAD (Apr 19).

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