Today the MPC meets at the Bank of England to determine whether interest rates need to be changed. You’ll recall in the aftermath of Brexit, Governor Carney suggested that rates might have to be cut. The question, following the appointment of Theresa May as the new Prime Minister is considerably different from the scenario everyone thought would arise. At the time, it seemed likely then that there would several weeks of campaigning before the new Prime Minister was selected, but events have moved much more quickly. So the question is.. does this change things? After all there is considerably less uncertainty in the market now than there was before, and in fact sterling has been rallying, although it had a somewhat weaker close yesterday. There are other factors of course, not least the prediction that the UK is likely to enter a recession in the coming months following the significant drop in business forward investments caused by Brexit. Indeed, economists also expect the Eurozone economy to be negatively impacted in the coming months as well. In any case, the forecast from those same economists is for only a small number of MPC voters to advocate a cut, so in all likelihood we’ll get no movement in rates, but a very cautious statement about the outlook for the UK. That in itself will be enough to impact sterling, so the thing to look for is how dovish will the MPC be relative to expectations. We’ll know later on today. In front of that, I don’t expect traders to take big positions because it really is on a knife edge. I don’t have much to say about the new ministerial appointments, we’ll need to see what they say and do over the coming days and weeks to form any opinions on changes in UK policy.
Elsewhere risk sentiment continues to look very positive. OPEC is becoming more positive on the oil outlook, despite an overhang in inventories. They’re predicting $60 up until 2018. Good luck with that.
A brief mention regarding Japan, and Prime Minister Abe’s victory, last Sunday, in the Upper House elections. He now has the mandate to push ahead with discarding pacifism from the Japanese constitution. There are huge geopolitical implications with this, not least Japan’s tense relationship with China, but on a higher level the interaction between China and the West is likely to be the most significant foreign policy issue of the 21st century. This is something to monitor in the years ahead. First the Japanese Prime Minister will push ahead with a fiscal stimulus for the perpetually ailing Japanese economy. Quite how this is possible with an already massive government deficit, I’ll leave to those with more imagination than me!
Finally, the polls seem to be turning in Donald Trump’s favour. I’m reminded of an observation in the great tv series ‘The West Wing’… “Republican’s always poll better than Democrats when the focus is on security issues”. After the Dallas shootings perhaps we shouldn’t be surprised. A long way to go yet, but it certainly doesn’t seem as if we should anticipate a straightforward coronation of President Hillary Clinton. Brexit should have taught us all that by now…
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