The Weekly Update

UK PM Theresa May’s Brexit speech and Donald Trump’s inauguration were the main features last week although China grabbed some attention, with 2016 growth releases surprising on the upside.

The week started with Donald Trump stating he will look to offer the UK a fair trade deal once he is officially in office. Although the UK is unable to sign up to any trade deals until it is formally out of the EU, it can look to get the paperwork in place. Theresa May will be meeting with Trump and his advisors this week to further discuss US-UK trade deals; where it is expected that tariffs cuts are due to be discussed and the doors open on either border for ‘free movement’.

Markets braced themselves on Tuesday morning ahead of what was so far the most important speech of UK PM Theresa May’s career, where she shed some light on the the highly anticipated Brexit strategy. The main takeaway from May’s speech is: the UK is to leave the single market, but Britain would seek an ‘associate membership’ of the customs union and ’a new equal partnership -- between an independent, self-governing, global Britain and our friends and allies in the EU’. On immigration, May stated control over Britain’s borders was a priority, adding that the nation will continue to welcome ‘the brightest and best to study and work in Britain’, however there will be control over numbers from the EU. It is still too early to tell how the UK economy will be affected by a ‘clean Brexit’ as negotiations will commence once the Parliamentary vote is cast. The IMF upgraded the UK’s economic growth forecasts to 1.5% for 2017, pencilling in a downgrade to 2018 growth expectations to 1.4%; the caveat of possible trade barriers and other unknown Brexit effects could see these forecasts revised somewhat however.

Elsewhere, on Tuesday, for the first time ever a Chinese president took centre stage at the World Economic Forum in Davos. This gathering was starkly different from previous summits, as the two biggest events of 2017 (so far), i.e. Brexit and the incoming of the possibly less trade-friendly US administration, are against everything that Davos - the global problem-solving think-tank - stands for. High up on Xi Jinping’s agenda was economic globalisation and free trade. Xi Jinping also echoed what Chinese policy makers have reiterated time and time again, that it is not their wish to devalue the renminbi to make exports more competitive. But their intention is to manage the redback against the recently expanded CFETS currency basket; of which the dollar is a large component. Non-manufacturing activities make up over half China’s GDP, so why, after all the country has done to reform its economy to more sustainable, consumer-led growth, would it wish for a weak currency; a rhetorical question. The offshore renminbi is  2.43% higher against the dollar and over 2.14% versus sterling so far this year.

A data heavy week confirmed economic stabilisation in China. The Q4’16 GDP release surprised on the upside, at 6.8%yoy, while 2016 GDP was 6.7%; comfortably within the official target. Meanwhile December’s industrial production reading was in-line with expectations, while retail sales beat consensus calls for 10.4%, at 10.9%. We expect policymakers will continue to aim for growth ‘around 6.5%’ for 2017, they have become increasingly aware of better quality and sustainable growth; with a higher tolerance to slower growth. Expectations are that they remain proactive in terms of fiscal expansion, however monetary support could be tightened as the country looks to contain financial risk.