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LGT Vestra US

CIO Question Time – Sterling up and defending globalisation - Jan 2017

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

Why was sterling up during Theresa May’s Brexit speech?

It is worth noting that markets move on expectation and correct following the final outcome. The pound had fallen ahead of the Prime Minister’s speech and rallied after her explanation of the negotiating stance. However, May’s speech was not the only factor contributing to the move:

1. The speech received a lot of attention but we should have expected most of what she said. It was a wish list and negotiating stance, not a result. The fact that the end deal will have to go to Parliament is no surprise; the repeal of the European Act would always have had to go to a vote with the necessary replacement legislation.

2. At about the same time, Trump commented that he thought the dollar was too strong and questioned Republican proposal for border tax adjustment which caused the dollar to be weaker.

3. Earlier in the day, UK inflation numbers had come in higher than expected, resulting in a more balanced picture for rates from the Bank of England (BoE). BoE members, Mark Carney and Andrew Haldane, have alluded to this in recent speeches. The higher than expected inflation was affected by air fares over the holiday period but we expect inflation to continue to rise in the months to come as oil and currency moves feed through. This may not persist as one-off effects wear off and the BoE may be reluctant to take back last summer’s rate cut, however a more balanced outlook is likely.

What this episode DOES demonstrate is how sensitive the currency has become to political comments. Brexit negotiations and the Trump administrations trade stance will continue to influence currency moves day to day. However, in the long run we need to focus on what is actually done rather than Trump tweets and political posturing.

What effect do you think President Xi’s speech at Davos, defending globalisation will have on markets?

President Xi’s speech at Davos included a robust defence of the benefits of globalisation and warned against the dangers of a trade war. This should be seen in the context of repeated comments from President-Elect Trump on putting America first. China has been a source of low cost production and has benefitted from globalisation of trade, so it is no surprise to hear President Xi defending the status quo. Some of Trump’s team are saying that the threat of tariffs may be sufficient to prevent further movement of production facilities to countries such as China and Mexico. The President-Elect’s dealings with Taiwan have further irritated China and Trump ought to remember that China owns nearly 10% of the US treasury market which has helped US interest rates remain low. To conclude, China needs US trade and the US need Chinese support for the treasury market. For now, Xi’s speech has had little impact but the balancing act that is US/Chinese relations will need to be carefully monitored. Some may say that the US has been over deferential in the past and Trump is just addressing the balance, but diplomacy by tweet may not be the best way forward.

 

 

 

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