Still bullish UK
The market continues to make speculative negative bets on the eventual effect of Brexit on the UK economy. We remain optimistic based on Europe and UK mutual beneficial relationships that the end-result will be significantly less severs then a “hard” Brexit. Within a historical context Europe-UK relationship has always had ups-and-downs but interactions have always been a constant. That will not change now. Second, both parties benefit equality from relationship (including bilateral trade), so threats are really meaningless. UK domestic demand has slowed (annual retail sales ex auto fuel rose 2.6% vs. 3.8% exp from 4.1%) after a strong rally post Brexit with many pointing to fears over punitive relocation in the financial sectors and its low productively growth as the culprit. In addition, the rally in the GBP has removed some currency advantage for exporters and lure for foreign buyers.
We agree uncertainty will clearly keep investment subdued yet the outright collapse or relocation of the UKs vital financial sectors is overblown. Also, other key fundamentals remain healthy. UK economy rose faster than many G10 nations, as 1Q GDP expanded 0.3% (pessimist point to the fact that pace was slowest since before referendum) with annual rate at 2.1%. The break down was still optimistic with manufacturing sectors rising 0.5%, construction grew by 0.2% and even the service sector increased by 0.3%. We remain optimists that the final outcome will be “soft” Brexit and effect to the UK economy will be manageable.
Swiss retails sales
Swiss annual real retail sales in March surge to 2.1% from 0.6% indicating that the domestic growth remains a solid contributor to economic acceleration. This is good news for the Alpine nation as domestics demand has stagnated for much of 2016 (February saw expansion). This strong recover will be viewed positive by the SNB which has struggled to keep CHF form further overvalued. We anticipated the SNB Foreign Currency Reserves to have further increased (abate at a slower pace) following the market friendly results of the French elections. We expect with Macron in clear control of the French presidential race EURCHF should remain well supported alleviating pressure from the SNB to intervene.
Fed to indicate rate tightening path
After the ECB last week, we have a very loaded week in terms of Central Banks. The Fed, RBA, Norges Bank will decide about their rates. Investors are now expecting the Fed to show some hints regarding its tightening path. For the time being, US financial markets are clearly driven by Trump. The US president promises that his fiscal reform to be the “largest ever”. We nonetheless remain suspicious as the failure of the Obamacare reform indicates strong difficulties for Trump to apply his program. Markets seem anyway quite confident about this reform (The corporate tax should be lowered to 15% from 35%) and the US equity market is trading around its all-time high levels (below 2’400 points for the S&P 500).
Regarding fundamentals, US first quarter data printed lower than expected, growth 0.7% q/q vs 2.1 expected and retail consumption have disappointed 0.3% versus 3.5 at Q4 2016. There is anyway one motive of satisfaction, business spending is trending higher and the US central bank may be very cautious by not raising rates too early. We do not forget that the US debt is so massive that increasing rates above 2% may prevent the country to service its debt. For the time being inflation is on the rise (2.4% y/y) is very useful to kill the debt.
At the moment, we are reloading our Eurodollar bullish position, the time for the Fed to provide markets with a strong hawkish signal.
