Sterling contemplates the prospect of blood and back-stabbing.... Yup, it's the Tory Party Conference

Monday 2nd October 2017

Sterling contemplates the prospect of blood and back-stabbing ..... Yup, it's the Tory Party Conference

ref :- "Sterling sinks to three-week low on economy, Tory conference" , Reuters Markets

With the kind of regularity that makes such episodes seem inevitable, the UK's ruling Conservative party sinks into bouts of infighting that are never less than damaging, electorally-speaking. Every now and again, usually after an extended period in office, these degenerate into something truly suicidal. As we head into the week of the party conference it does look as though there's a decent chance that the Tories could once again shoot themselves not so much in the foot, but squarely in the side of the head. As ever Europe, and the egos of one or two of the major players in that debate, will at the heart of things.

Mind you, the possibility of another "Et tu, Brute ?" moment at the top of the Conservative party is not the only reason that £/$ is trading back down towards $1.33 this morning. The recent rally in cable from $1.28 to nearly $1.36 after BoE hints of a rate rise always felt a little overdone, and probably incorporated something of a "short squeeze"  --  investors who had previously sold sterling scrambling to cover their positions. Only a few days on, and faultlines undermining the Pound are back in focus.

Data on Friday showed the UK's Q2 year-on-year GDP slowing to 1.5%, with the current account deficit also increasing more than expected. A closely-watched measure of economic activity, the Manufacturing Purchasing Managers Index (PMI), was released this morning with September's number coming in at 55.9, considerably lower than the expectation of 56.4. We know that foreign exchange-driven inflation concerns are a worry for the Bank of England, and that they may have painted themselves into a corner in once again signalling an imminent rate hike with their credibility under scrutiny, but the market may well be wondering just how appropriate a rate rise will be with an economy beginning to stutter.

Actually, even allowing for the softness in the UK's economic data, the weak showing of £/$ this morning is also function of a generally strong Dollar. The US unit is still benefitting from the partial revival of the Trumpflation Trade brought on by last week's tax proposals. As we discussed, there are a few mountains to climb before anything is likely to pass into law but plainly the general direction of the what we know so far is in theory growth-friendly, with upward implications for rates and yields. 

The hawkish tone is only reinforced by weekend speculation that Fed Chair Janet Yellen, less doveish  of late but not President Trump's cup of tea, will be replaced by Kevin Warsh. Mr Warsh is generally considered more hawkish than Ms Yellen, and we have to assume that fits the bill as far as the President is concerned. On the campaign trail, Mr Trump was constantly hectoring Janet Yellen and the Fed for their overly easy monetary policy (in his eyes), though since he has repeatedly said since taking office that he's a "low rates guy" , it's fair to say that his public stance on these matters may change according to his audience.

Anyway, back to Sterling ..... which as we were saying hasn't fared too badly against the other currencies and is almost unchanged against the Euro at €1.1335. That of course is because the Euro's got problems of its own  ...... specifically Spain / Catalonia. It's clear that whatever one's views on the subject of Catalan independence, the footage of masked policeman knocking elderly voters about and a total of over 800 injured is a disaster for the government in Madrid. After the heavyhanded (thuggish ?) police response to the referendum ordered by Madrid, looking from afar it's very hard to see how this could end well. What seems obvious is that Spain is facing an existential threat and Europe has found its next crisis. 

What is less clear is how much of an effect this will have on markets. It must be a drag on the Euro, but may not preclude advances if other data point in its favour. The effects are likely to be seen most clearly in Spanish bonds, where the premium required by buyers of government bonds over the benchmark German equivalent could be about to widen.

Sorry, we keep going off on a tangent ..... The Tory party conference ! Let's put it this way : after a terrible decision to call a general election, a feeble campaign and an approach to Brexit that seems to be taking a softer hue than many more ardent Brexiteers in the party would like, it seems that at the very least PM Theresa May's position is highly vulnerable. As happens all too often with the Tories, the sharks are circling  --  some of them none too discreetly. Foremost amongst them of course is Foreign Secretary Boris Johnson  --  genial British eccentric or national embarrassment, depending on your point of view.

If this conference reveals a Johnson coup to be on the cards, it could have a number of ramifications for Sterling, none of them good. A government led by Boris Johnson would by definition seek a hard Brexit, which would be bound to cause a sell-off of the Pound. Moreover if he was to oust Theresa May, inevitably given the fragile coalition status of the current government a general election would have to be called before too long. Now that really will get the long-term traders of Sterling thinking.

The way things are going, and if the evidence of the last election is anything to go by, it seems likely that the Labour party would cruise through in the next poll. It's said that some Tories actually joined the Labour party before their leadership contest in order to vote for Jeremy Corbyn, so sure were they that Mr Corbyn and his hard left policies could never get elected. Well, if it's true those guys may very well get what they deserve. 

The unexpected surge in Labour support witnessed last time round and that nearly got them into power was of course most evident in younger voters. Most economists might argue that it's not so surprising, since most of them were not even born , never mind remember the 1970s, and old-fashioned Soviet era socialism. The markets will remember them though, and the truth is that whatever one's political sympathies, THE MARKETS will equate the current Labour party's agenda with the Tax and Spend, Unions-Out-Of-Control reality of 40 years ago.

The image of then-Chancellor of the Exchequer Denis Healey going cap-in-hand to the IMF to seek a bail-out for a bankrupt Britain in 1976 has haunted the chances of success for a truly left-wing Labour party ever since. If the younger generations of the UK electorate decide that it's time to give them another go, then a hard Brexit and a Tory leader prone to putting his foot in it may be the very least of Sterling's problems in the longer term. So keep an eye on Manchester, and any sign of a traditional Tory bust-up going nuclear.