Financial market research and analysis

The pound shortly reversed gains accumulated through the Asian session, as the European Council revealed the draft guideline for the Brexit.

 The EU said ‘nothing is agreed until everything is agreed’.

In the first phase of the negotiations, the UK will be asked to ‘settle the disentanglement of the UK from the EU and from all the rights and obligations the UK derives from commitments undertaken as a Member State’. The UK needs to pay the bill of 60 billion pounds to the EU before advancing toward further stages of the divorce.

Second, the UK should ‘provide as much clarity and legal certainty as possible’ to citizens and businesses on the ‘immediate effects’ of the Brexit.

The trade agreement will be discussed at the advanced stages of the negotiations. The EU states cannot negotiate bilateral agreements with the EU states, as the 27 remaining Member States will act as one. Hence, the UK will need to fight alone against the European Union, which could eventually reshuffle the balance of power in disfavor of the parting member, the UK. The Council’s draft guideline made it clear that the trade agreement could not ‘amount to participation in the Single Market or parts thereof’.

The FTSE opened downbeat, as the softening pound failed to wet investors’ appetite.

From an economic point of view, news were good. The UK's 4Q current account deficit shrank more than expected. The UK printed a current account deficit of 12.1 billion pound versus 16.3 billion expected, down from 25.5 billion pound printed previously. The UK's final GDP data came in line with expectations; the UK's gross domestic product grew by 0.7%q/q on the fourth quarter.

Cable held the ground above the 1.2444 in London. Dip-buyers are touted at 1.2415 (50 and 100-day moving averages). The bullish development could encourage a third test of the 200-day moving average (1.2580), before challenging the March high of 1.2614.

Yet, the appreciation in the pound carries the risk of heavy headwinds, as the Brexit discussions could shake the markets at any time. Due to the lack of visibility, traders should take extra care in terms of their downside risk management.


US economic data revive Fed hawks, US dollar appreciates 

The US economy grew by 2.1% in the fourth quarter of 2016, slightly higher than 2.0% expected by analysts. Personal consumption rose by 3.5%q/q over the same period versus 3.0% expected, the GDP index increased to 2.1% from 2.0% and the core PCE rose to 1.3% from 1.2%. The strong economic data effortlessly boosted the Federal Reserve (Fed) hawks, especially after several Fed members voiced their hawkish opinions regarding the US interest rate policy earlier in the week.

The CNBC news that the US will pursue the currency manipulators also helped driving inflows into the greenback, an issue that President Donald Trump repeatedly blamed China for. In response, China said to push for a ‘greater balance’ in terms of trading with the US, including softer restrictions on high tech exports from the US to China. Chinese President Xi Jin Ping will meet Trump next week.

The US stocks gained as the solid economic data and the hawkish Fed expectations rejuvenated the Trumpflation trades.

The S&P500 (+0.29%) and the Dow Jones (+0.33%) ended Thursday’s session on a positive note; financials (+0.80%) once again lead gains. The Dow Jones is called 58 points softer at $20’670 at the US open.


It is another story in China

Across the Pacific Ocean, the sentiment was mixed. In one hand, investors appreciate China’s efforts to ease restrictions and improve international and trade relationships. On the other hand, Donald Trump’s reluctance vis-à-vis China is a major concern. We remind that Donald Trump has recently proposed to apply 45 % import tax to Chinese products.

The USDCNY soared past 6.90. Chinese stocks traded mixed; Shanghai’s Composite (+0.38%), while Hang Seng (-0.68%).


South Africa is boiling, rand plunged 10% in one week

In South Africa, the political environment gets tenser as President Jacob Zuma fired and replaced the finance minister Pravin Gordhan by Malusi Gigaba, the Home Affairs minister who is believed to have little financial experience. Zuma’s strategic move is perceived as an attempt to strengthen his power on the country’s finances and raise tensions at the heart of the government.

The rand plunged by nearly 10% since the beginning of the week. The heavy headwinds suggest the possibility of a further rise in USDZAR to 14.00/14.50.