In one of the least surprising pieces of news this year, UKIP and Mark Reckless won the Rochester & Strood by election last night by around 3,000 votes or 7 percentage points. This was slightly less of a win than had been expected but, as the old football adage goes “It doesn’t matter how they go in, just that they do.” Reckless has become the Eurosceptic party’s second MP after Douglas Carswell took his by election in Clacton last month.
There has been limited market impact to the win to be honest. In fact, the story of it all is less about what UKIP did than what happened to the other parties. The Conservatives came second having thrown a kitchen sink at the vote to no avail. A front bench Labour Party member has resigned after a photo that seemingly mocked working class people in the town was posted to Twitter. Finally the Liberal Democrats had their worst Westminster election result ever, just beating the Monster Raving Loonies into 5th place.
It is clear that six months before the General Election, the UK voting populace is more fractured than I can remember and that the prospects of a UKIP spoiler into the election is now almost guaranteed. As we have said before, it is therefore the increased prospects of some form of British exit from the EU that is the fear for investors in to the UK in the coming few years. UKIP leader Nigel Farage thinks he can win 40 seats in May and we should see further GBP weakness should additional defections from the main Westminster parties occur between now and May.
Sterling actually ran higher on the day as UK retail sales accelerated higher in October, gaining 0.8% on the month against a 0.3% expectation. Retailers are cutting prices and consumers are thanking them for it. Prices in every category of goods measured in this release fell for the first time since 2002. Retail sales are a volume measurement – not one of value – and therefore in the current period of disinflation, it is almost a certainty that they would be looking strong. Obviously on a value basis, that does not apply and we are expecting to see retailers warn about margins in their Q3/4 earnings releases.
Unfortunately moving forward, while there is a case to be made for a good Christmas for consumers – with sales discounts likely to open earlier and be deeper than years before – the outlook for the high street as a whole is not a good one. Until real wages start improving – something that we see happening late in Q1 of next year – the recovery of both UK consumers and retailers cannot be guaranteed.
PMIs in the Eurozone remained in a poor state through November, preliminary data has shown us. The index fell to 51.4 from 52.1 in October, the lowest level since July of last year. These are not game changing figures and therefore lessens the likelihood of game changing policy from the European Central Bank moving forward. Will there be further easing from the European Central Bank moving forward? Almost certainly. But will this easing be exactly what the markets are looking for? Almost certainly not and therein lies the rub. Euro was quiet on the session.
Yen is fighting back this morning after the Japanese Finance Minister Taro Aso told reporters that the yen had devalued too rapidly in the past few weeks. JPY is down 9% in the past month following the increased monetary policy stimulus from the Bank of Japan three weeks ago and the prospects of a ‘snap’ election. PM Shinzo Abe is expected to dissolve the parliament later today before laying out a timeline towards the vote at a press conference.
Today’s data calendar is very quiet and we would expect recent trends to continue playing out. That being said, the recent USD rally is in a tough place at the moment. A lot of the market is still looking for USD strength and this is shown in the positioning of traders. While this may tire in the short term there is nothing that I can see that invalidates the trend of a stronger USD.
