Markets are focusing on a few key factors this week from the major economies. A further look under the bonnet of the Chinese economy comes with this week’s growth data which will have an impact on risk appetite. The US Presidential Election continues to draw near and the final of the three debates between Trump and Clinton will also impact markets, whilst the European Central Bank monetary policy decision could help to mould further expectations and risk. We look at the impact that this will all have on forex, equities and commodites. Oh, and of course expectations of how Brexit will pan out are also continuing to impact.
Just over three months since the referendum the impact of the UK’s impending Brexit beginning to show. The sterling sell-off from $1.50 against the dollar just prior to the referendum result has resulted in an 18% decline, (c. 16% on a trade weighted basis). There are various arguments to be made of the impact of a weaker sterling, with the most bullish being that the depreciation of sterling can combat the large current account deficit of 5.6%. Cheaper sterling means imports are more expensive and exports are cheaper, helping to rebalance the current account. However, studies have shows that currency depreciations do not have an automatic stabiliser for current account deficits. In August, input price rose at their highest level since December 2011 and this week we will find out the data for September. This has driven a spat between Unilever and Tesco, with the food producer arguing a 10% increase in its wholesale prices. Inflation is coming. Bank of England Governor Mark Carney has already stated that the Bank will tolerate higher prices (i.e. keep monetary policy accommodative) to protect economic growth and jobs. This is likely to keep a lid on any sterling recovery. However, also a disorderly sterling decline (such as, I don’t know, a flash crash?) could jeopardise confidence of foreign investor investing in the UK, something that would be negative for the current account deficit. The economics of Brexit currently do not look rosy.