Sunday 18 March 2018

Daily Market Update: Sterling falls to 84p for the first time since March 2014

Brexit Photo by Christopher Furlong/Getty Images
Brexit Photo by Christopher Furlong/Getty Images

Richard Ramsey

One of the many areas of post-referendum focus for market analysts in the weeks and months ahead will be tracking the signals from the incoming data in order to understand and calibrate the extent of the shock to economic confidence and activity both in and outside the UK.

Timely data points will command a premium in this environment, with the monthly PMI surveys well-placed to play an important role in this task. 

News from Friday served as something of a benchmark in this respect with June manufacturing PMI results released for the UK while the ISM equivalent was issued in the US.  The UK figures were actually quite a bit better than expected.  June recorded a modest improvement in factory activity as the headline index rose from just above the breakeven level of 50 in May to 52.1 in June – its highest level since January.  There was a solid acceleration in inflows of new work in the sector as new orders rose at the quickest pace since last October, helped by ongoing strength in the domestic market and a slight uptick in new export business.  Critically, however, almost all of the responses to the June survey were received prior to the end of June 23rd (the day of the vote).  So as tempting as it might be to draw encouragement from these results, Friday’s figures simply don’t provide any gauge of any early post-vote hit to activity.  For that we will need to wait for next month’s results for meaningful clues.  In the meantime, the June figures really only set the base from which we will be assessing the Brexit impact in the months ahead, commencing with the July figures in a month’s time.

The US ISM manufacturing index also surprised to the upside on Friday, with the headline index comfortably beating Wall Street forecasts in rising to 53.2 last month.  This marks the fifth increase in the past six months and takes the index to its highest level since February 2015.  We think that there is more information value in the June ISM results relative to the UK equivalent as the US economy’s direct export exposure to the UK is very small at just 0.5% of US GDP.  In this sense, the US is less likely to be thrown off its underlying trend, meaning that June data in the US (which provide an update on those underlying trends) are more helpful and meaningful than their UK equivalents. Thus, we do take encouragement about US growth momentum from Friday’s ISM figures.  So while it obviously will be very important to track the US data closely for any Brexit impact, at this stage our thinking is that Brexit impacts on the US will likely be pretty limited.  More generally, the extent to which the US weathers the Brexit storm in the months and quarters ahead will be very important in shaping the extent to which Brexit becomes a major global economic shock.  Our initial thinking is that likely US resilience can play a very important stabilising role, which should help limit the fallout for the wider international economy – a scenario that would be particularly helpful from an Irish perspective given that we do about as much export trade in aggregate with the US as we do with the UK.

On the currency markets, the better UK PMI result unsurprisingly provided little support for sterling which made another new post-referendum low against the euro at over 84p on Friday afternoon – levels last seen in March 2014.  There wasn’t anything in particular driving this move, just more of a continued grind lower as markets continued to digest both the currency-negative implications of Carney’s dovish speech on Thursday and the ongoing uncertainty in the UK political system.  Eur/GBP opens at 83.75p while GBP/USD trades at $1.3280 as the markets begin their second full week of trading post the referendum.  While sterling has come a very long way very quickly, we continue to see the risks around sterling’s outlook in the period ahead as skewed to the downside, and continue to see Eur/GBP at 85p or higher.

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