Global View

2019 was a year of little growth globally with expansion at its lowest annual rate since the financial crises. Generally, economic activity slowed both in the developing and advanced economies with trade tensions impacting exports, industrial output and capital spending. There seems to be a change in tone towards protectionism which has impacted overall confidence.

This slow-down has however been relatively slow with the World Bank estimating that global GDP grew by 2.4% in 2019, down from 3.0% in 2018 and 3.2% the year before.

Debt levels have risen globally with the ration of global debt to GDP now at 230% compared to 200% in 2010. With interest rates at historic lows, central banks are helping to ensure that the management of this debt is low, however the counter argument, in the words of Mark Carney, the Bank of England Governor, is that banks are running out of the ammunition needed to combat any downturn.

Pound rocked by EU comments on vaccines

Pound Sterling: Falling GDP Figures and Risk of BoE Interest Rate Cut Weighs on the Pound

UK news has been focussed on the threat of Flybe going into administration. The company was saved with a last-minute agreement between the government and share holders earlier this week. That saved the jobs of some 2,400 staff but equally important was the regional businesses Flybe service with most of their flights being domestically across the UK connecting rural business hubs from Inverness to Jersey.

In other news, on Monday is was reported that GDP figures for the UK fell 0.3% in November against the expected result of no change. This has increased the prospect of an interest rate cut by the Bank of England at their next meeting this month, which in turn puts pressure on the value of the pound. Sterling fell to its lowest level this week against the euro in nearly 2 months when reviewing the interbank rate of exchange.

Some traders now think there is a 50% chance of a cut in interest rates from the Bank of England which meet later this month, as reported in the Telegraph over the weekend. Craig Erlam from Oanda puts the odds at 60% following the inflation data that was released yesterday morning which showed a fall. Survey data in the form of the Purchasing Management Index (PMI) due on the 24th will now have extra importance. Samuel Tombs, of Pantheon Macroeconomics, said: “The MPC’s decision to cut the Bank rate will hinge on business surveys released over the next two weeks relating solely to the post-election period."

If rates were to be cut down to 0.5%, this is the levels that they were at when the current bank Governor took the job. Mr Carney is scheduled to leave the bank at the end of the month.

In some positive news UK trade balance has shown an improvement and a record high of £4bn in November. UK Retail figures are next to be released on the state of the UK’s economic health which is due on Friday morning.

US Dollar: Donald Trump Secures Phase One Trade Deal Before Upcoming November Election

The US economy continues to perform well with US job creation remaining strong, but growth in wages has continued to slow. The US trade deal took a step forward with the ‘phase-one’ trade deal struck between the US and China in December and was signed by senior officials yesterday. Interestingly, this is something that is not widely covered in Chinese media. US President Donald Trump said the pact would be "transformative" for the US economy.

It is not expected to be the end of the debate, especially with it being an election year in the US. President Donald Trump may judge that an escalation of trade tensions would hit a slowing US economy and be bad for his chances of re-election in November. Mr Trump’s underlying view of China is unlikely to shift, but he may refrain from new tariffs which could make life difficult for US consumers and farmers in the build up to the election.

Interestingly as part of the trade truce China has now pledged to buy almost $80 billion of additional manufacturing goods from the US over the next two years and by over $200 billion compared to 2017 levels. Perfect timing for an election year perhaps?

Next on the radar for the USD is economic data due today with regards to Retail figures and tomorrow on Consumer sentiment.

Eurozone Recovery Gathers Pace but Inflation Remains a Concern

Euro: German Industrial Production Expands in November

The eurozone economic health remains sluggish however, slightly less so recently after euro area retail sales beat expectations for year on year in November, expanding by 2.2%. German industrial production also rebounded in November, growing by 1.1%. Consumer confidence from Germany is released later this morning and expected to remain at 1.5% suggests FX street. Tomorrow is the busiest day for the euro with Consumer Price Index released at 10am. This is expected to equally show a slight expansion which in turn could have an impact on the cost of buying the single currency as we end the week.

Brexit Updates

Brexit remains a hot topic, even though UK MPs passed the governments Withdrawal Agreement Bill focus is now on the House of Lords which put it under further scrutiny this week. Then thereafter the conversation is focussed on the trade deal discussions with the UK’s largest partner.

With PM Boris setting timelines for a deal to be meet of only 11 months, worry is building that an agreement may not be met within that time period. European Commission president Ursula von der Leyen said ‘the 11-month Brexit transition period was not long enough to reach a comprehensive trade deal.’ This in turn is pushing up forecasts of a weaker or no deal scenario, which in turn has hindered the value of sterling.

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