Daily Commentary BY THE CURVE TEAM –

Geopolitical Risks Remain

23rd of May, 2018

The positivity that followed the joint announcement by China and US faded overnight as geopolitical issues came back to the fore. Monetary policy normalisation was also back in the headlines, this time in the UK with a number of BoE members speaking overnight.

President Trump reignited geopolitical tensions overnight and cast doubt over the potential for significant progress on trade talks. Coming out of a meeting with the South Korean President, Trump aired his displeasure with the trade talks thus far. He also spoke on the upcoming summit with North Korea, going as far as saying “it might not work out.” 

Markets seem to be underpricing the risk of a misstep and it could get ugly depending on how the US-North Korea and US-China situations evolve.

There was plenty of talk in the UK from BoE members overnight but it was Governor Mark Carney’s comments which were most interesting. First he pointed out that Brexit has cost each household 900 pounds and that the economy is now 1% smaller than expected 2 years ago. He then went on to say:

“In the short term, over the last year and a half, there has been an impact relative to what we would have expected, even with some pretty good tailwinds on the back of this economy.”

Despite the underperformance of the UK’s economy, Carney still sees the need for higher rates. The timing and magnitude are likely to be both further away and not as large as some had been thinking.

Today in Australia we get the first of the partial indicators of growth in the form of construction work done before RBA Governor Lowe speaks at the Australia-China Relations Institute tonight where he sill discuss the opportunities and risk of deepening economic relations between the two countries.

David Flanagan

Director - Interest Rate Markets