Brexit battle descends into bathos
- Thursday's ECB meeting shows bank in a 'holding pattern'
- Brexit campaigns veering between scaremongering, self-parody
- NFP release to be followed by remarks from FOMC dove Brainard
“Success is going from failure to failure without loss of enthusiasm” — Winston Churchill
Yesterday’s European Central Bank meeting provided very little that we didn’t already know (an unchanged EURUSD exchange rate after the press conference is testament to that), but there were a number of subtle implications that are worthy of note.
Effectively, this was a holding pattern from the ECB as they await the impact of the "kitchen sink" policy actions taken March, especially those that have not yet been implemented such as the corporate bond-buying programme and TLTRO II.
ECB president Mario Draghi stated that the bank retains ample flexibility and room for further monetary expansion (not surprising given the market reaction to his admission that interest rates are at the lower bound in March), maintaining the explicit easing bias/forward guidance. Furthermore, the staff projections pointed to higher growth and inflation for this year, yet unchanged inflation and lower growth at the two-year "policy relevant" horizon.
This supports our view that the recovery in Eurozone activity in the near term is cyclical and that structural long-term weakness remains.
Draghi was clear that euro area growth prospects were being damped by subdued emerging market prospects, Brexit risks and slow structural reforms. However, he also explicitly reignited the currency issue with the reiteration of the ECB lower for longer mantra in conjunction with the statement that the EUR exchange rate is “important for price stability” and, “reflects the relative difference of [monetary] policies”.
From a technical perspective there are a number of signals that indicate the potential for renewed downside risks to the EUR, even excluding the potential impact of a Brexit. The basic balance (the sum of the current account, FDI and portfolio flows) remained fairly stable throughout 2015 as large portfolio outflows offset the current account surplus. However, a recent acceleration in FDI outflows and outward M&A provide a deteriorating backdrop that should ultimately weigh on the EUR.
“...all the virtues I dislike, and none of the vices I admire” — Winston Churchill
In the UK, the Brexit debate is heating up and with less than three weeks to go, the polls (and even bookies’ odds) have narrowed. Unfortunately, the quality and content of the debate has deteriorated into almost caricatured politicking. For the Remain camp, Britain is not just stronger in the EU, but could never leave as the implications would be too catastrophic (a stance for which Cameron appears to be coming under increasing criticism for).
For ‘Leave’, the EU is the source of all the UK’s exaggerated woes.
Both sides risk patronising and alienating their respective support. ‘Project Fear’ has so far singularly failed to address any of the risks to the UK economy from remaining in the EU (particularly given the almost inevitable push for political and fiscal union within the Eurozone - leaving the UK in the EU but to all intents and purposes out of the loop).
‘Vote Leave’ has also failed to address what the plan would be should they achieve their goal.
“One does not leave a convivial party before closing time” — Winston Churchill
With the polls narrowing, time elapsing, and the politics heating up we expect the debate to gain increasing prominence in financial markets over the coming weeks. In the regard we would expect volatility to pick up, UK equities to begin to underperform, and GBP to become vulnerable in FX markets once more.
For today, however, the focus of financial markets lies with the US employment report for May.
Corporate profit drag (and strike action) and GDP weakness are likely weigh on the headline figure which we expect to dip below the 150,000 mark. However, this pace of hiring is likely still enough to nudge the unemployment rate lower and does nothing to damp the impressively resilient US labour market expansion.
“I’m just preparing my impromptu remarks” — Winston Churchill
For FX, equity markets and broader risk sentiment, the bigger emphasis will likely be on the reaction of US yields (rate expectations) from the employment report. US two-year yields have fallen back over recent sessions, following the move higher on the (relatively) hawkish comments from Federal Reserve chair Janet Yellen ahead of the long weekend, and any push into new high ground will likely weigh on equities and boost the USD.
Any developing sentiment could well be tested or compounded into the close as the "arch dove" on the Federal Open Market Committee, Lael Brainard, adds her thoughts on the economic outlook and monetary policy at 1630 GMT.
— Edited by Michael McKenna
Neil Staines is head of trading at The ECU Group