European Elections Puts Brexit Talks on Hold
This week, after a delightful break, we get back to Brexiting. True to form, whatever small signs of progress there might have been have evaporated after cross party talks were reported to have ended without progress; it looks likely now that nothing will happen until after the elections. While the European elections are getting all the attention, the more interesting contest is in the local council elections. While the European elections will be fought between Brexit focused fringe parties, that isn’t indicative of a general election. If the Tories get wiped out in the local elections however, that will likely focus the minds of government MPs. A credible opposition threat might stop the party from fighting with itself and unify around a compromise position.
Elsewhere speculation has begun over who will replace Mark Carney at the Bank of England. The current governor is due to leave Threadneedle Street in 2020 and his replacement will extremely influential given how dominant monetary policy has become in determining economic performance.
US: Earnings Season Results Surprise Analysts
With over a third of the S&P 500 companies having reported earnings, now would be an opportune moment to have an early look at the state of the US economy. Muted global growth and heightened political risk led to market analysts believing this quarter’s earnings will be negative. On the contrary, earnings so far look to be flat with the possibility of it ending positively. Tech stocks rebounded from last quarters losses with Microsoft and Facebook posting strong results closing up 3.3 and 5.9 per cent respectively this week.
Earnings were much less rosy for the most shorted US stock, Tesla. The electric carmaker reported a loss of $2.9 a share, much weaker than the anticipated $1.3 loss. This quarter, it has only increased production by an additional 1,900 cars (63,000 model 3 cars in produced in Q1). With three more quarters to go, its target of delivering 400,000 cars in 2019 looks very punchy. Shares in the stock closed down 4.3% per cent. However, Tesla is unlikely to directly affect the upward progress of the S&P 500, one of the requirements for inclusion into the index is at least four quarters of positive earnings, which the car-maker has yet to achieve.
EM: Macri’s Rocky Presidential Campaign Stokes Default Fears
Rampant inflation, ongoing recession and slowing growth was always going to be a slippery platform for Argentina’s President Mauricio Macri to run his second political campaign and what once appeared a cakewalk now looks very uncertain. Former President Cristina Kirchner whose policies of tax led to high inflation levels and subsequent default is rapidly gaining popularity and has taken a lead in the polls with only 6 months to go until general elections.
Headline inflation now stands at a 55 per cent and Macri’s inability to shore up votes largely stems from his austerity plan not being as effective as hoped. Investors spooked by last year’s currency crisis are now backing the country to default for the third time in less than twenty years. The 5-year credit default swaps rose up 30.54% during last week implying the probability of a default now stands close to 60 per cent.
Oil: US Threatens to end waivers to key importers of Iranian Oil
The second half of last year’s oil rally was caused by fears that sanctions imposed by the US would lead to an undersupply. Major importers of Iranian oil such as India and China were warned to wind down their reliance ahead of the November deadline. Subsequently, the Trump administration performed a U-turn granting extended waivers to these nations. The unexpected shift caught out the OPEC cartel and its allies who agreed to step up oil production and sent crude prices tumbling. This week, the US administration is set to end these waivers by May 2nd, depriving Iran of its main source of revenue. Following the announcement, oil prices rose by 2.9 per cent. While a similar scenario of Saudi Arabia and the UAE cranking up production is set to play out, this time levels may have to be higher as OPEC member states struggle. Over in Libya violence has erupted in the region and in Venezuela, a political deadlock has destabilised the nation.
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