Might May be on her way out?
In October, we were essentially waiting for two things. Central bank meetings were not expected to move the markets, while economic data from the US showed an economy on the rise. The UK and eurozone continued to stumble along in America’s wake. Two things then: would there be any progress in the quest to secure a Brexit deal and would Donald Trump’s controversial style lead to a ‘blue wave’ in the midterm elections?
The rhetoric surrounding Brexit became slightly more positive, with Dominic Raab appearing to suggest he would be ready to answer questions on a finalised deal on 21 November 2018. He quickly backtracked when it became clear his optimism was misplaced. Sterling tried to rally twice, hitting $1.3250 the first time and $1.3140 the second, but the moves ended up being short-lived. There was speculation ministers were preparing to stage a Cabinet meeting where they would review the wording of a Brexit deal.
However, then Johnson came along and ruined the party – not that one this time, but his brother Jo. He resigned and encouraged others to do so, warning that the proposed Brexit deal was a very bad thing indeed. Theresa May will no doubt be experiencing conflicting feelings, as while she appears to be close to securing a deal, her position is hanging in the balance. It would not be a surprise to see her position threatened.
Blue rinse rather than blue wave
In America, Trump took to the campaign trail and deliberately targeted states where Republicans and Democrats were most vulnerable in the Senate. Ultimately, the plan worked, with Republicans winning more two more seats and cementing their hold on the upper House. However, it wasn’t all rosy for Trump, as Democrats took control of Congress; the landslide predicted by some did not quite materialise, but it will certainly be more difficult for Trump to pass bills now that absolute power has been wrestled from his grasp.
Some Democrat congressman have their eyes on the 2020 elections and so are not minded to oppose Trump in any meaningful way. The president was also quite welcoming in his language on the day of the results which helped calm the markets. There is something called ‘seasonality’ which sees the dollar generally strengthen later in the year and it looks as if that might happen again this year.
Political and economic uncertainty in the eurozone
In Europe we saw Angela Merkel, arguably the pre-eminent politician of this era, react to ongoing criticism by announcing she would step down as head of the CDU this year, and from the post of Chancellor in 2021 when her term ends. This weakens Germany politically to follow the economic weakness we have seen in recent months.
All of this is taking place against a backdrop that could soon become a crisis: there is an ongoing standoff between the EU and Italy over the terms of the Italian budget. This is causing concern across the eurozone and the euro has been trading at fresh lows against the dollar. While the single currency has stabilised somewhat throughout the month, the outlook is still not great and it would not be a surprise to see it sink further against the greenback.
Of course, all of this is happening just as the European Central Bank is set to finish supporting the market with its quantitative easing programme. The bond-buying scheme is scheduled to end after December 2018 but some quarters have been calling for the ECB to consider a new LTRO (Long Term Refinancing Operation) as a potential solution to the concerns of European banks.
The timing is ironic to say the least, but does serve to highlight the corner than Mario Draghi has painted himself into. The notoriously dovish ECB president has not increased interest rates once in his seven-year term, leaving the bank with little wriggle room.