Daily analysis 03.10.2016

The British Prime Minister, Theresa May, established a date for initiation of formal process of exiting the European Union. As a result, the pound lost significant value this morning. Positive industrial PMI data for the European countries, including Poland.

“Hard” Brexit

The news of the day is the statement from the British Prime Minister, Theresa May, which she made on Sunday. This statement concerned the Brexit initiation date. According to Bloomberg, May gave herself time to activate the Article 50 of the Treaty of Lisbon. She said: “We will implement it as soon as we’re ready. And we will be ready soon.”

It states in Article 50 that negotiations regarding a particular country leaving the European Union cannot take longer than two years. However, if no agreement between the UK and Brussels is achieved, the Brits would leave the EU and trade would be determined by the roles of the World Trade Organization (WTO). This would mean that the United Kingdom would actually leave the EU in 2019. However, May’s announcement is most likely an element of the negotiation strategy, because the State Secretary of Foreign Trade, Liam Fox, did not want to comment on the exact date of Brexit in his interview with BBC.

According to Bloomberg, Theresa May had mentioned the UK’s potential trading partners at the Conservative Party conference in Birmingham, including China, India, Australia, Mexico, Singapore, South Korea. This cooperation would be impossible if the United Kingdom remains within the EU customs zone. May also referred to one of the main reasons of the Brexit referendum, which is immigration control. She intends to negotiate the best possible agreement, but not at the cost of resigning from the possibility of border control.

Even though we know when the negotiations will start, as well as Britain’s firm view regarding immigration, significant details of this process remain unknown. It’s most likely that we will know very few of these details. At the above mentioned conference, Theresa May said that she will not talk in detail about the negotiations, as well as about the government’s goals. The purpose of such an attitude is to be able to work-out the best possible agreement and she expects the same of her ministers.

The pound lost approximately 1% against the basket of currencies this morning. Keeping negotiation details in confidence may be positive for a better negotiation strategy. However, it doesn’t have to be necessarily positive for the economy or currency. The lack of confidence regarding the future trade with the EU (which is the UK’s largest trading partner), as well as the rules of hiring foreign employees by British companies, may negatively impact the UK’s economic perspectives and increase the pound’s weakness.

Positive PMI readings from Europe

The British prime minister’s statements have sidetracked today’s readings even though they are, at the very least, as important as Brexit proceedings. This is especially taking into consideration that their majority appeared to be better than estimated. The IHS Markit, which calculated the PMI, informed that the PMI of Germany and of the euro zone remained unchanged at the level of 54.3 and 52.6, respectively. Even though the PMI data for Spain, Switzerland, Italy and France quoted a better result than their previous values, as well as than the market consensus, it was yet again the British information that surprised the market today.

In Friday’s Afternoon analysis, we took note that the British PMI was expected to decline from 53.3 points to 52.1 points in month on month relation. We could also see a wider depreciation trend of these readings over the past few months. However, the IHS Markit surprised the market with the data from the British industry at the level of 55.4 in September. This is its highest result since May 2014.

An increase in the consumption goods sector (it was the most rapid in one-and-a-half year) contributed the most to the above mentioned growth. A rebound within the industrial sector that has been progressing for the past two months (after the previous PMI readings, which were below 50 points) has also encouraged companies to increase employment. It has been increasing for two consecutive months as well. The weaker pound has also caused an increase in export orders, as well as in production prices.

The IHS Markit senior economist, Rob Dobson, stated that “the pound’s low exchange rate has been remaining the main driving force, which caused an increase in orders from Asia, Europe, the USA and many emerging market countries.” A positive PMI reading from today should ensure a high level of GDP growth for the third quarter and give a positive signal to the economy for the fourth quarter. After the above data was published, the British currency slightly worked-off its losses against the currency basket (from 1% to approximately 0.8%). However, we continue to see its significant overvalue.

Polish industry is also better than expected

The market consensus estimated the Polish industrial PMI to be above its level from August (52.2 vs 52). The Markit data shows that these estimates were accurate. This is this the index’s best reading in six months, as well as the twenty-fourth month in a row when the reading has been above the level of 50. However, we need to emphasize that despite quite positive data, the PMI remains below the average of expansive sequence, which is 52.6.

Even though the industrial sector’s growth pace was fueled by production, new orders and component delivery dates, an increase in employment in industry was at its lowest level in two years. The Polish PMI data had a minor impact on the zloty. The Polish currency remained at its level from Friday. This morning, the euro was at the level of 4.29, but a relatively positive data from the Polish industry, as well as the global sentiment may push it to the level of 4.28. On the other hand, the GBP/PLN got near the level of 4.91.