By Michael O’Neill
Freezing February morphed into March madness. The NCAA basketball tournament is only minor insanity for financial markets. The primary focus is a surfeit of Central Bank meetings and of course, the Ides March 15 may be the date when UK Prime Minister Theresa May suffers the same fate as Julius Caesar, at the hands of her disgruntled MPs.
US and China trade talks, Brexit, dovish-leaning central banks and the now familiar President Trump-triggered turmoil, were the mainstay of markets in February. March will bring more of the same.
March is the month when migrating birds return, heralding the start of spring. The doves are already here. In fact, the Bank of Canada (BoC) doves arrived before Christmas, followed by a bevy of those birds from the US, Europe and Asia in January. The BoC ‘s concern about the impact of a 35% plunge in West Texas Intermediate (WTI) oil prices on the Canadian economy, led them to push expected interest rates increases further into the future. The Fed’s dovish turn may have been in response to a steep plunge in US equity prices. However, they couldn’t admit that after President Trump blamed their policies for the carnage on Wall Street. Instead, Fed Chair Powell blamed global economic and financial developments for a need to be “patient” and “data dependent.”
The Fed’s need to be patient will not have changed by the March 20 Federal Open Market Committee meeting. Mr Powell testified as much on February 27 in his Semi-Annual Monetary Policy Report to the Senate. He repeated concerns of slowing growth in China and Europe. He fears elevated uncertainty around Brexit, and the ongoing trade negotiations. He is also worried about low productivity growth and stagnant incomes.
The European Central Bank (ECB) is even more dovishly entrenched than the Fed. The ECB warned of downside risks at their January 24 meeting, and a recent string of weak Eurozone data has confirmed that outlook. On February 19, ECB Chief Economist Peter Praet said they could adapt their forward guidance on interest rates if the economy were to slow sharply. The ECB faces other risks including Brexit and Italy. The European Union is not happy with Italy’s “excessive economic imbalances” which “are a threat “to other eurozone countries.
Even worse, President Trump repeated his threat of auto 25% tariffs on EU imports. The President is annoyed with the pace of EU/US trade talks and wanted to motivate negotiators. The EU is the biggest exporter of cars, and the US is the biggest importer. Trump sees trade talk leverage. He is justified. The EU slaps a 10% import duty on American cars while the US only charges 2.8% on imports.
The Bank of Canada (BoC) steps up to the plate on March 6. The Canadian economy looks a whole lot better than it did at their January meeting and WTI oil price have risen 20%. Canadian economic data has been mostly positive. Arguably, the BoC could justify a “hawkish tweak” to their policy statement. They won’t. The Canadian dollar has gained over 3.5% since the last meeting, easily outpacing the rest of the G-10 major currency pairs, except for Sterling. The BoC would be loath to fuel additional gains in the Loonie as it makes Canadian exports more expensive. They can easily justify another dovish policy statement by following the rest of the G-10 central banks and blame “global uncertainty.”
March madness will be on full display in the coming weeks as Beijing and Washington trade negotiators hammer out a new deal. US Trade Representative Robert Lighthizer told the House Ways and Means Committee that they are making “real progress.” Things could get even more interesting if the reported friction between Lighthizer and Trump is true. Trump is said to have been embarrassed when Lighthizer contradicted his description of a Memorandum of Understanding. If true, the US Trade Representative could join a long line of turfed high-ranking officials in Mr Trumps administration.
Even so, no country will do March madness better than the United Kingdom. The government triggered Article 50 on March 29, 2017, kicking off the formal discussion about leaving the European Union. There is less than 29 days before they are supposed to leave the EU, and the British don’t have a plan. While, they have a plan. It was PM May’s, but the British parliament voted against it by a margin of 432-to 202 on January 15. Fortunately, they have a new proposal. Parliament votes on it March 12. Unfortunately, it is the same as the old deal. It’s only hopes for being passed is if politicians are afraid of a “no-deal” Brexit. They are. A vote to ensure that Britain doesn’t leave the EU without a deal is slated for March 13. If that vote passes, the next day they vote to ask the EU for a 60-day extension. The EU may ask how the British expect to come to an agreement in 60 days when they couldn’t get anywhere after 729 days. It’s a valid question, but the EU won’t be unscathed in the event of a “no-deal” so they will be motivated, reluctantly.
The March of the bankers and their bevy of doves greatly contrasts with what is shaping up to be a UK debacle delivered by a befuddled, partisan parliament. But it will be interesting.