A bag of crisps
The Department for International Trade published a report yesterday morning that sets out just how little the UK economy will benefit from an “ambitious and comprehensive” trade deal with the United States. Investors were unimpressed, and sterling was the weakest among the majors for a second successive day.
It was unfortunate that the report came so closely on the heels of the government’s threat to walk away from trade negotiations with the EU. In particular, it brought to mind the warning of Sir Martin Donnelly two years ago that to give up trade with Europe in preference for America was like “giving up a three-course meal… for a packet of crisps”. Trade with the States would add an estimated 0.16% to GDP in 15 years while the economy could shrink by 7.6% in the absence of a trade deal with the EU.
Investors could see no redeeming features in the strategy and they marked sterling down across the board. Its smallest losses were of around half a cent each to the North American dollars and it gave up one and a half euro cents
All together now
Expectations continued to grow about the prospect of widespread central bank rate cuts. The Reserve Bank of Australia was among the first to act this morning. Political leaders are also thinking of joining the action, with a G7 conference call scheduled for this afternoon.
There were two unusual reactions when the RBA cut its cash rate from 0.75% to 0.5% this morning: the Aussie dollar went up and Australian share prices fell. Both were apparently the result of buy-the-rumour-sell-the-fact syndrome. It is not clear who will be next to cut but there are high hopes for the G7 leaders’ conference call, as reflected by the positive tone in risk markets on Monday.
Investors did not pay overmuch attention to Monday’s economic statistics. Sentiment still holds sway and they were in a mood to be positive. Britain’s purchasing managers’ index for the manufacturing sector was a theoretically disappointing 51.7 but it was stronger than the two measures from the States, which came in at 50.7 and 50.1 .there was further improvement in the German manufacturing PMI, though much of that was down to “deterioration in supplier delivery times”.
Inevitably, investors will be investing a great deal of hope in today’s G7 virtual meeting. That means plenty of scope for disappointment, as is also the case with the idea of coordinated rate cuts: the European Central Bank, for example, has much less room for manoeuvre than the US Federal Reserve.
The economic data will do no more than keep things ticking over today. Switzerland has announced a 0.3% expansion of GDP in Q4 and South Africa is pencilled in for a 0.1% contraction. Spain and Italy will report on unemployment this morning and euro zone inflation is forecast to be a touch lower at a provisional 1.2%.
The main event across the Pond is the “Super Tuesday” primaries, which will be an important indicator of who will face Trump in November’s presidential election. Tonight brings Australia’s fourth quarter GDP.