New article from Tatton Investment Management: The quick and the not-so-quick

29 July 2019

It’s official: May is out and Boris is in. But despite the political changes this could bring, currency markets hardly reacted. £-sterling started the month at €1=£0.897, and remains at that level at the time of writing. It has weakened marginally since last weekend. Negotiators on both sides of the channel have signalled intransigence ahead of any new talks. Talk of an election before the Halloween deadline is growing. After Mr Johnson’s question-time pummelling of Mr Corbyn (Quentin Letts in The Times), markets may not fear the prospect of a left-wing government so much. The opinion polls will be interesting over the next few weeks. Still, Mr Johnson will not forget Mrs May’s electoral blunder and certainly won’t be eager to hold the record for shortest tenure.

For investors, the risks remain large, and the outcomes binary and balanced. Our rough calculus is that “no deal” has about a 33% chance – causing sterling to fall 10-20% – while “deal” is more likely at about 66%, sending sterling up about 5-10%. While we think about Brexit outcomes often, we don’t have any more information than others, so we don’t think this is a good area to carry active risk for our clients. 

Last week, we wrote about the likelihood that there would be monetary policy action from the US’s Federal Open Markets Committee (FOMC) and the Governing Council of the European Central Bank (ECB). This Thursday saw a statement from the ECB, followed by a post-meeting press conference from President Mario Draghi. The decision was very clear. Unanimously, they have decided that is necessary to do something at some point, probably soon.

Draghi told reporters that all ECB members agreed further stimulus was needed, while the ECB changed the forward-looking component of the official statement, saying that it now expects its key interest rates to remain “at their present or lower levels” at least through the first half of 2020.

“A significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favourable and support the euro area expansion”, though there were differences regarding the various elements of any program. “We had a broad discussion,” he said, “Whenever we have a package so complex as this, you’d expect that people have different nuances about the different parts of the package.”


 

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