Where exactly is that ‘special place’

After more than a month of solid gains the world’s equity markets have taken a step back as

the new Chinese year gets underway- the year of the pig (hopefully not a pig of a year!).

Following a week of closed Chinese markets their resumption this morning has been

characterized by losses across Asia, the immediate catalyst for which seems to have come

from the news that Trump will now not meet with Xi before the March 1 st tariff deadline.

However, that prospect could just as easily change again and in any case, and as I said on

Monday, I think the greater concerns continue to rest with what’s unfolding in the

Eurozone. The news this week that France recalled its ambassador to Italy has highlighted

those. Perhaps the most ironic thing about the deteriorating row between the two countries

is that one of the issues raised has been the sending back of migrants flowing into France

from Italy and the resultant lengthy delays and checks this has caused at the French/Italian


But hang on a minute that implies there is in fact a ‘hard border’ in place doesn’t it? Isn’t

there supposed to be seamless ‘free movement’ here? A highly pertinent question given

what appears to be the main stumbling block with Ireland and the whole Brexit debate.

Well, I will let you figure that one out as I cannot resolve the inconsistency. Meantime,

those Italian 10year yields that I highlighted on Monday have continued to advance, up

another 20bp at 2.94% as of 7am this morning.

The understatement of the week thus far- comments regarding the ‘special place’ by the

‘unelected’ president of the EU council, Donald Tusk being described as ‘unhelpful’ by some

of his colleagues. Perhaps Tusk ought to pay a visit to the French/Italian fringe to get a

better idea of just what soft border looks like?

Meanwhile, the EURUSD is continuing to remain under pressure as the USD index closes

back above 96.50 yesterday. Further evidence this week that the German economy looks

like it dropped off a cliff in Q4 2018 is not helping the single currency either. Italy is already

technically in recession and Germany looks increasingly like it will do well to avoid a similar

fate. News this morning of a sizeable contraction in the ‘non seasonally adjusted’ December

trade surplus there won’t be ignored either.

Naturally, the problems unfolding in the Eurozone are likely to be blamed on Brexit and

China and whilst there’s good reason to agree with that prognosis, at the same time this

doesn’t explain the structural problems and the export dependent nature of the whole

region- a region that continues to lack sufficient internally driven demand.

Mark Carney did what he does best yesterday and issue further warnings on the impact of a

no deal Brexit as the Bank of England kept its base rate on hold at 0.75% at the same time as

markedly lowering their 2019 growth forecasts. The further message from Carney and the

‘old Lady’ was the degree of ‘optionality’ on the path of future monetary policy. Once again,

they also warned that pressure on rates will increase if the pound falls significantly. Hardly

rocket science, but Carney and co may well be right, even if they have made the point

enough times already.

Irrespective of what ‘optionality’ the Bank offered yesterday, I should note that regardless

of where interbank deposit rates are right now, several retail outlets are offering rates

above 2% for 1 year fixed deposits. Some are even offering rates in excess of that for ‘call’

deposits. Whilst such rates may look high compared to the wholesale market, they could of

course end up looking cheap in a few months’ time. If nothing else, this is at least a good

indication of the degree of institutional demand for cash at the moment.

So, the GBPUSD did gain some traction yesterday, rising from around 1.2850 to back above

1.2950 come the US close as the GBPEUR also lifted from a session low of 1.1345 to as high

as 1.1455. The latter move is partly down to the EURUSD continuing to languish at the

bottom end of its most recent range. I said previously that I felt this pair would continue to

trip over itself and that’s exactly what it has done, albeit at a snails’ pace, but unless

something changes this looks like heading lower still. The most immediate point of note on

this might be a breakdown through support noted at the 1.1300 level.

So, casting the clock back to slightly earlier in the year, when it looked to many like the Fed’s

‘volte Face’ would undermine the US currency. I said previously and again on Monday that I

was highly dubious about that anyway and nothing that has transpired so far this week has

given me any reason to think otherwise. Just look around and ask yourself the question-not

just about where exactly that ‘special place’ is- but more importantly, where’s the best

place to be invested this year?

Important Economic releases due today

08/02- 1.30pm Canadian January unemployment report