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What have we been up to


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2018 – dare to be optimistic

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Although 2018 has had a rather demure start, with little change in major currencies in the first week of January, there are a number of developments which have set the scene for a more optimistic outlook.
Africa’s most industrialised economy, South Africa, has been the beneficiary of very positive market sentiment in the week leading up to the ruling party’s African National Congress’s elective conference on 16 December to choose a new leader of the ANC, betting that Ramaphosa would beat president Zuma’s ex-wife. This optimism was vindicated (partially) and Ramaphosa did win, albeit by a very narrow majority. ZAR and local bonds have rallied strongly, the latter by more than 75 bps. The Rand raced to a nine-month high immediately after the announcement of the result, trading at levels last seen prior to Zuma removing the former finance minister, Pravin Gordhan. Rumours currently abound regarding a possible recall of the president. If he were to remain in situ until the next general election in 2019, two centres of power would exist, making policy setting almost impossible. Ramaphosa will need to balance populism with pragmatism, and because he won only a narrow victory he will have to reach a compromise with Zuma supporters.
Now let’s turn to the UK and, inevitably, Brexit. May’s last-minute agreement with the EU at the end of 2017 means that we are now on to the next phase, the negotiation of the future relationship which includes trade. Being optimistic in the run-up to phase two of Brexit is challenging, but here goes: despite Brexit fears, UK firms are optimistic about an economic recovery in 2018, and a majority expect domestic sales growth supported by an increase in the -non-EU markets order book. According to the Engineering Employers’ Federation (EEF) poll representing manufacturers, 40% of factories are planning for growth in their industry for 2018 compared with 19% who are forecasting a decline. 62% of firms expect sales to grow in the domestic market. For this optimism to continue it is imperative that the Government reach a speedy transition deal with the EU. To this end the prime minister reshuffles her cabinet today, and has moved four ministers at time of writing (Davis, Johnson and Rudd all appear to be safe). IHS Markit data showed the dominant UK services sector picking up in December 2017 and followed solid manufacturing growth. Sterling continues to benefit from tailwinds and receding Brexit headwinds, the latter however being more a case of a lull in Brexit news helping to underpin the pound. Cable, at 1.3532, appears to be closing in on the September 2017 high of 1.3650. Inflation remains a concern and, together with Brexit uncertainty, is sure to keep the BoE from moving any time in the near future on interest rates. Rates will rise, but at a very measured pace and very definitely dependent on Brexit indications.
In the EU, economic confidence hit its highest level since August 2007 according to survey data from the think tank Sentix released earlier today. Eurozone manufacturers are more optimistic about their prospects than at any time since the sentiment in the sector was first measured in 1985, a further sign that the economy’s expansion is set to continue over the coming months and continues to support strong fundamentals. Political uncertainty has failed to dent this positive sentiment, in spite of Germany still not having formed a coalition government. The ECB will not be raising rates in 2018, and with its normalization process on autopilot, the euro will not count the central bank as a significant driver in the near term. EUR/USD is currently at 1.1996.
Across the pond, Trump’s tax changes may yet boost the economy. They certainly enjoy the support of the Dow industrials, with almost all of the 30 constituents that responded to a recent survey applauding the legislation. The Dow breached 25,000 for first time ever and is showing no sign of slacking its pace. The dollar continued its rebound today, charging higher on further hawkish comments from several Federal Reserve members who hinted that at least three rates hikes are pencilled in for 2018. Treasury prices reacted negatively after weaker than expected December jobs data took the shine off rate hike expectations, leaving the yield curve steeper.
What to look out for this week:
The EA December Sentiment Indicator is already out, having come in ahead of forecast at 116.0, as are November Retail Sales, December Business Climate Indicator and December Industrial Confidence. This bodes well for further EU economic growth.
Wednesday’s UK production, manufacturing and trade balance figures will be key indicators of whether conditions are improving locally. The forecast is for month-on-month improvements in production and manufacturing. The trade figures, if at or better than forecast, will add to the positive sentiment already in the market.

All views expressed here are the Author’s own and are based on information available at the time of writing



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