Strengthening Pound and Gold, Weakening Dollar and Stocks

January 17, 2017

British Prime Minister Theresa May delivered a speech on Brexit that

  • Rejects any residual partial association with the European Union,
  • Prioritizes total control over immigration above special rights to the single market,
  • Informs that an all-out arrangement for the U.K. would leave it in position to negotiate trade separate trade deals with all countries.
  • Hopes for the best in upcoming exit negotiations because non-punitive terms would also be in the best interest of citizens in the remaining EU members,
  • Asserts that any final deal will not be undertaken without a parliamentary vote of approval,
  • And says that no deal at the end of the day is better than a bad deal.

May’s speech in reality doesn’t clarify much that wasn’t already known. The dollar has fallen 1.7% overnight against sterling. Having touched $1.1986 at one point yesterday, the pound is trading above $1.2250 now. The 10-year gilt yield is down four basis points, and the Ftse-100 has fallen 0.4%.

The dollar has recorded other big losses, dropping 1.3% against the euro overnight and by 1.2% versus the kiwi, 1.1% relative to the Mexican peso and loonie, 1.0% vis-a-vis the yen, Swiss franc and Australian dollar, and 0.7% against the yuan.

Chinese President Xi Jinping, speaking at the opening session of the World Economic Forum in Davos, Switzerland, defended globalization and warned about the risk of a trade war.

The IMF updated its World Economic Outlook, which now projects global GDP growth of 3.1% last year, 3.4% this year and 3.6% next year. The 2017 and 2018 forecasts are unchanged from those made last October. U.S. growth this year and next were bumped higher by 0.1 and 0.4 percentage points to 2.3% and 2.5%. Projected British growth this year was increased 0.4 percentage points to 1.5%, but the 2018 forecast was lowered 0.3 percentage points to 1.4%. GDP in Euroland and Japan are expected to rise 1.6% and 0.8% in 2017. Among the BRIC economies, 2017 GDP growth is now projected to be 0.2% in Brazil, 1.1% in Russia, 4.9% in India and 6.5% in China.

Share prices in Continental Europe have declined so far today by 1.1% in Germany, 0.8% in France, 0.6% in Switzerland, 0.5% in Spain, and 0.3% in Italy.

Japan’s Nikkei slumped 3.0%, falling back below 19K. Equities in other markets of the Pacific Rim fell 0.9% in Australia and 0.2% in India but rose by 0.7% in Taiwan, 0.5% in Hong Kong, 0.4% in South Korea and 0.2% in China.

10-year sovereign debt yields are down five basis points in Spain, Germany and Italy, four basis points in the U.K., 3 bps in Switzerland, and one basis point in Japan. U.S. futures point to an 8-bp decline in the 10-year U.S. Treasury yield.

Comex gold advanced 1.7% to $1,216.50 per ounce.

West Texas Intermediate crude oil climbed 1.3% to %53.04 per barrel.

Revised Japanese industrial production figures confirmed the 1.5% increase in November reported late last month. Output exceeded the year-earlier level by 4.6%, and production in October/November averaged 1.6% greater than the third-quarter mean. The ratio of inventories to industrial shipments fell 5.6% on month and 6.7% on year, which is an encouraging development. Industrial capacity was unchanged, but industrial capacity usage climbed 3.0% on month.

British price data surpassed expectations in December, buoyed by higher global inflation and previous sterling depreciation. The CPI rose 0.5% on month and to a 29-month on-year high of 1.6%. Retail price inflation accelerated to 2.5% in December from 2.2% in November and 2.0% in Otober. Producer output price inflation rose 0.3 percentage points to 2.7%, while producer input price inflation shot up 2.5 percentage points to a whopping 15.8%.

The British government’s house price inflation index, formerly compiled by the Department of Communities and Local Government, continued to ease, in contrast. It’s 12-month rate of rise was 6.7% in November, down from 6.9% in October and 8.7% last June.

The German ZEW Institute released its measures of investor confidence toward Germany and the whole euro area. For Germany, the ZEW expectations index climbed to 16.6 this month after printing at 13.8 in both November and December and just 0.5 as recently as September. Current conditions leaped to a reading of 77.3, which is a 66-month high, from 63.5 the month before. Regarding Euroland, the ZEW expectations index advanced to 23.2 from 18.1, and the sub-index for current conditions printed at minus 0.4 after subzero readings of -8.3 in December and -12.7 last July.

Italy’s trade surplus of EUR 4.2 billion in November was somewhat larger than the year-earlier surplus of EUR 4.0 billion. Exports rose 5.7% on year.

In Australia, new motor vehicle sales rose 0.3% on month but just 0.2% on year in December. A 0.9% monthly rise in home loans during November reversed a 0.6% drop the month before.

The Empire State manufacturing index, which is compiled by the New York Federal Reserve Bank,¬†slipped to a reading of 6.5 in January from a downwardly revised 7.6 reading for December but remained above November’s score.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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