LCG: Pound steady after plans to suspend Parliament

August 29, 2019

The higher close on Wall Street didn’t spill over into Asian trade overnight. US stocks rose on Wednesday as the energy sector was lifted by higher oil prices, however sentiment was kept in check with the US yield curve inverting further, fuelling fears of a recession.

Recession fears and trade concerns dominated across the Asian session as investors digested the latest developments in the seemingly never-ending US – Sino trade dispute.

The lack of clarity is making it extremely difficult for traders to judge where the dispute is heading. Instead investors are homing in on the lack of urgency by the Trump administration to resolve the dispute, which is weighing on sentient. There is little appetite for riskier assets such as equities right now. With the next round of tariffs to start from September 1st, investors are waiting to see if they are actually implemented- or again reduced and delayed.

European and US futures are pointing to a lower start on the opening bell. Safe havens such as Japanese yen and gold have been steadily climbing across the Asian session on heightened risk aversion. Meanwhile the bond rally continues unabated with the once overlooked 30 year treasury yields declining to a record low of 1.9%.

US GDP expected at 2%

With fears over the health of the global and US economy dominating, the first revision of Q2 US GDP will be closely watched. Expectations are for economic growth to have ticked 0.1% lower to 2% on an annualised basis. However, the fact is the US labour market remains strong despite the trade war. US firms have maintained a high level of hiring as they respond to domestic demand. The slump in the US manufacturing sector, which represents a small percentage (12-15%) of the US GDP is not significant enough to derail growth, particularly as it shows little signs of spilling over into the consumer sector.

Pound steady following Bojo’s suspension of Parliament

The pound has held onto losses after dropping 0.6% in the previous session when UK PM Boris Johnson took the decision to suspend Parliament for 5 weeks before Brexit. A Queen's speech is overdue but the timing makes it clear this is a move to protect his Brexit plan. We only have to look back in history to Charles 1’s suspension of Parliament to see that this could easily not end well. History shows the dangers of an unruly Parliament and the risks involved when measures are taken to stop MP’s from doing their business.

The move by Boris Johnson will limit the time that his opposition have to derail and stop a no deal Brexit. However, it also lifts the chances of a vote of no confidence and a general election. Boris has forced Corbyn's hand so the vote of no confidence really has to happen next week. Given the fact that the odds of a no deal Brexit increased substantially yesterday, the pound is holding up well and finding support at $1.22.

Opening calls

FTSE to open 6 points lower at 7108

DAX to open 15 points lower at 11685

CAC to open 8 points higher at 5361