LCG The Week Ahead: G7 Meeting, German spending & Brexit hope – By Jasper Lawler, Head of Research.

 

Introduction

This is LCG’s look ahead to the week beginning August 26th. We discuss the G7 Summit taking place in Biarritz France- where world events from the trade war to Hong Kong protests to Brexit will be discussed by world leaders of the G7 countries. This week sees the release of a lot of economic data from Germany, which many predict is sliding into a recession- and has pledged to spend circa 50bn euros in case there is a crisis. There was also some good news on Brexit last week, which we think can carry through to the coming week. It’s worth noting too, that it’s the last week of an eventful summer. We also run down the key economic data release for the week.

Markets backdrop

We finally got some reprieve for the British pound last week when German Chancellor gave Boris Johnson 30 days to find a workable solution for Brexit – increasing the chances a deal can be done. EURGBP falling below 0.91 was some important price action, suggesting potential for further downside in the pair. Overall, the risk-off tone of the previous two weeks disappeared, with stock indices mostly higher and gold down a touch, hovering near $1500 per oz.

Economic Calendar

Date & Time Name Country Prev. Est.
08/25/2019 G7 Meeting G7 Countries
08/26/2019 08:00 IFO – Business Climate Germany 95.7 95.2
08/26/2019 12:30 Durable Goods Orders United States 2 1
08/27/2019 06:00 Gross Domestic Product (YoY) Germany -0.2 -0.2
08/28/2019 14:30 EIA Crude Oil Stocks Change United States -2.732
08/29/2019 07:55 Unemployment Rate s.a. Germany 5 5
08/29/2019 12:00 Consumer Price Index (MoM) Germany 0.5 0.3
08/29/2019 12:30 Gross Domestic Product (YoY) United States 2.1 2
08/29/2019 23:30 Tokyo Consumer Price Index (YoY) Japan 0.9
08/30/2019 09:00 Unemployment Rate Eurozone 7.5 7.5
08/30/2019 09:00 Consumer Price Index (YoY) Eurozone 1 1.1
08/30/2019 12:30 Personal Spending United States 0.3 0.5


G7 Meeting

To be frank there probably won’t be a lot for traders coming out of the G7. There has been some talk of big multinationals including Nike announcing plans to go plastic packaging-free at the summit- which is very laudable but not so tradable. That said, with US President Trump in attendance, there is always a chance of big news. Last year, Trump famously refused to sign a joint statement / communique last year – so this year there will not even be one. One of the issues host Emmanuel Macron wishes to discuss is the global economic slowdown, which is clearly impacting sentiment in markets. We think there is a less than 1% chance that any coordinated international economic stimulus plan will be announced at the G7, but if it were- that we be a huge cue to start taking on more risk in financial markets.

Germany spending

About government intervention, it was important that Germany via its finance minister gave the first intonations that they would increase government spending to combat an economic slowdown. Although the DAX rose, it didn’t especially outperform on this news because of the huge caveat – that said spending would only happen during a crisis. If that caveat starts to give way – which it may begin to if Germany enters a recession – that would be a boon for German stocks- and for the euro – because of the lesser need for monetary stimulus from the ECB.

Brexit hope

It was coaxed in tough talk about altering the withdrawal agreement, but German Chancellor Angela Merkel & French President Emmanuel Macron both looked open to finding an alternative to Irish backstop in the next 30 days. Talk of Boris being ‘outflanked’ or ‘played’ is just political spin. The slightly reduced chance of a No Deal exit means there is room for some reprieve to the Sterling downtrend, at least while parliament is still out of session.

UK PM Boris Johnson is hoping that the removal of the Irish backstop will be enough to get Theresa May’s Brexit deal through parliament. The two problems with Boris’ plan are the high chance of a no-confidence vote and a general election – as well as the chance the deal still cannot pass parliament. We see a strong chance the deal fails, even sans-backstop. Remainers feel they’ve got momentum for a second referendum, especially with Labour now officially on side – and there are still many issues with the deal that Brexiteers looking for a clean break take issue with. On the assumption Boris holds his nerve, we still expect a No Deal Brexit on Oct 31, which is GBP-negative.

Financial Markets and Political Commentary
 

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About the author

Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.