A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Myth vs. Reality
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
The UK will officially exit the EU at 3 pm PST this afternoon. While this makes a nice headline, the reality is that the UK is just leaving in name only as it will enter into a transition period that keeps the UK-EU relationship unchanged through 2020 as the two sides negotiate a trade deal.
Looking forward, the question is, what happens to the GBP? Due to Brexit uncertainty, the pound has fallen sharply due to a variety of factors including a pullback in foreign inflows. Case in point, net foreign direct investment (which helps funds the UK current account deficit) practically came to a stop ahead of the general election.
As a result of the slowdown in foreign investments, UK assets are both under owned and undervalued. With near term Brexit uncertainty removed, some believe that investors would rebalance their portfolios to add underweight UK assets and lead to GBP strength as the currency converges to long term valuation levels. To us, this appears a bit premature.
One way or another, Brexit will fundamentally reshape the UK economy as the UK’s relationship with it largest trading partner gets redefined. It stands to reason then that any structural change to the relationship should also change the GBP’s relationship with long term valuation measures, undermining the argument that the GBP is cheap relative to its average since 2016.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The World Health Organization has declared the coronavirus outbreak a global health emergency. This declaration led to a bit of optimism as the WHO will “coordinate the response to a disease that has caused widespread concern and confusion.” Given this, the outbreak is still expected to get worse as illustrated by the UK reporting its first case overnight. While Chinese equity markets will reopen Monday and should sell off sharply, nearly two-thirds of the Chinese economy will remain closed next week.
China’s manufacturing PMI met expectations at 50.0 and non-manufacturing PMI beat expectations at 54.1. However, this print doesn’t include the coronavirus impact due to the timing of the survey.
European data came in softer than expected with GDP misses at the Euro area level and individual country level in Italy and France. Euro area CPI came in mixed but was skewed to the downside, and German retail sales data also disappointed.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Tune in for a guide to ETFs and investing strategies for potential long-term success. View in a browser Fidelity Fidelity Log in Creating a portfolio with ETFs: Why and how Creating a portfolio with ETFs: Why and how
Exclusive webinar: The market, my portfolio, and options. Exclusive webinar: The market, my portfolio, and options. View in a browser Fidelity Fidelity Log in The market, my portfolio, and options The market, my portfolio, and options
Post a Comment