Ere lunching in Brussels Ms May

Much progress had tried to downplay

The Irish condition

While long on ambition

Was not prepared for light of day


It turns out Ms May was correct

Her allies, the deal, did reject

And, too, there’s the question

Of legal digression

Thus both sides are still circumspect


In what cannot be very surprising to any onlookers, the enthusiasm for a deal between the UK and EU regarding the Irish border fell apart yesterday almost immediately after it had seemingly been agreed. Apparently, PM May’s supporters in the DUP, the Northern Irish Democratic Union Party, who remain critical to her maintaining her leadership role, are adamant that they want a physical border to be put in place between Northern Ireland and Ireland. Meanwhile, the Irish are adamant that no such border should be allowed to exist. The framework agreement had ostensibly agreed to the Irish demand and essentially created a border between Northern Ireland and the rest of the UK. However, the Northern Irish would have none of that and rejected the deal. At the same time, both Scotland and Wales, asked for the same treatment as Northern Ireland with regard to the EU, as, if you recall, both of those nations had voted to remain in the bloc. While PM May continues to sound hopeful, it seems pretty clear that one side is going to have to cave, and if history is any guide on these two nations, that is not going to happen. (Perhaps they can create a Heisenberg-type border, one that is either there or not there depending on when you look!) Not to be forgotten, the issue over the ECJ’s eventual jurisdiction of EU citizens living in the UK post-Brexit has also not yet been resolved. This one is much harder for me to understand. How an unrelated judicial system should be able to have sway over things impacting residents in a different country is beyond me. Consider if the EU, as part of a trade agreement with the US, demanded that EU citizens living in the US would be subject to ECJ rulings, not US Supreme Court rulings. It’s the same thing, and the height of hubris on the European’s part in my view.

At any rate, if you recall when I wrote yesterday morning, the pound had rallied sharply after word that a compromise had been reached. Well not surprisingly, the pound is today’s worst performer, having given up most of those gains yesterday afternoon in NY and then continuing its decline this morning. Right now, the pound is lower by 0.4% on the day, which has also seen UK PMI data released at somewhat weaker than expected levels. While Services growth remains decent, it appears to be slowing at the same time pricing pressures continue to increase. If you are Governor Carney, you remain stuck between rising prices and slowing growth, situations that require exactly opposite monetary policies. It is not an enviable position.

Away from the pound, however, the dollar is actually a bit softer overall, albeit not very much. The reality is that there has been very little direction in FX trading across the board for the past several weeks, with daily gyrations largely offsetting the previous day’s movements. If I were to highlight a broad theme it is the uncertainty that exists over the potential pace of monetary accommodation withdrawal by the world’s central banks. Certainly that continues to be the single most important question to be answered. Just how quickly will the central banks withdraw QE, and how will they respond if markets get unruly. And remember, over the course of the next two years, we are likely to see new central bank heads at all the big banks, adding further uncertainty. But that is an issue for another day, as trading today has certainly not been directly impacted.

Touring the rest of the world, there is very little of note to address. The Eurozone PMI data was right on expectations and points to continued GDP growth in the 0.5%-0.6% area. At the same time, Eurozone Retail Sales were a bit on the soft side, which has not helped the single currency this morning. Both Swedish and Norwegian data also continue to point to solid growth, and in those cases, the currencies have benefitted today. But again, the movements just aren’t very large.

Emerging market currencies have also been uninspiring with BRL the biggest gainer thus far, opening firmer by 0.55%, as the market continues to applaud what appears to be a turn in the economic trend there to one of more robust growth. Market participants, though, remain on tenterhooks regarding the ongoing pension discussion there. Unlike some nations, Brazil is attempting to address its state pension issues, a laudable goal although one that is fraught with short-term potential problems. (But that we addressed these issues back in the 1980’s!) From what I have read, I believe they will be successful in making needed changes to insure long-term solvency of the system, which will only help the currency going forward. But there were no nuclear tests, no comments of note and no new news to drive this bloc otherwise.

We continue to see equity rotation out of tech stocks into financials and industrials as investors are looking for those sectors that they believe will benefit most from tax reform in the US. My concern is that given the tech sector’s outsized role in driving broad indices higher, if this process continues, we could well see those broad indices retrace a significant amount of their YTD gains. And that might change a few minds regarding things like market volatility and next steps by the Fed.

In the meantime, we await the Trade Balance this morning (exp -$47.2B) and then the ISM Non-Mfg reading at 10:00 (exp 59.0). A strong reading for the latter could well add to flattening pressure on the yield curve, which has now fallen to 57bps in the 2y-10y spread. Historically, a bear flattening (when short term rates rise faster than long term rates) has been beneficial for the dollar. If I had to forecast today’s movement, I like the dollar to outperform by the end of the day, just not very far.


Good luck