Sterling stabilises after steep fall, European equities open weaker
The pound dropped sharply after the latest Westminster drama but is firming up this morning. Against the dollar sterling was off 1% from Tuesdays highs near 1.30 at 1.2870, having tripped as low as 1.2840 overnight. It’s lost the 10-hour moving average at 1.2906 which may now form a resistance point.
The pound remains the proxy for the Brexit process and it’s
displaying nervousness that Parliament still can’t get its act together and see
a deal through. Uncertainty prevails
for the time being, but Parliament has backed a deal and that feels like a key
passed its Withdrawal Agreement bill comfortably but lost its way with the
timetable. MPs chose to pull the handbrake on the government’s breakneck pace
of legislation and blocked the program motion. Taking time out, the government
chose to pause the bill – but did not abandon it altogether. Importantly,
Boris Johnson said that the UK would leave the EU with this deal come what may,
but did not stick to his Oct 31st do-or-die mantra.
This could be an
important, indeed key, shift in the government’s position as it indicates a
willingness to extend and then seek to get the bill through Parliament.
The mood of the government seems to be to get the EU to approve a 3-month
extension and call a General Election. Donald Tusk has called on EU leaders to
back an extension. France is unhappy about any delay, Germany says they want to
know why they should extend. The truth is the EU will extend, the question is
the length as that depends on the purpose. As we said last night after the
vote, with Parliament agreeing to
the WAB in principle, the EU may only back a short delay to get the deal
agreed. However the Benn Act specifies three months and therefore that would
tend to be the default – individual EU countries would need to argue why it
should be shorter. European leaders may be uncomfortable about what could lie
ahead if they enable an election.
And the problem remains for the government that holding a
General Election having failed to ‘get Brexit done’ will be oxygen for the
Brexit Party and could split the pro-Brexit vote. The other risk though is
that this unreliable Parliament throttle the bill with amendments and then the
government is forced to pull it and seek further delay and an election. One
sense Boris’s political capital would have run pretty thin by that point. Safer
to use the lead in the polls and the promise of this deal to hold an election
And even if this deal does get through sooner or later,
there is plenty of scope for ongoing volatility in the pound as we would quickly
be looking ahead to the end of the transition period. Britain and the EU have
until Dec 2020 to agree their new trade deal, but the UK could ask for an
extension by Jul 2020 if required – i.e. if it does not look like a deal can be
done in time. The mere fact though that we are talking about this now is an
encouraging sign for pound bulls.
Elsewhere, European equities have softened a touch in the
wake of the Brexit uncertainty and some mixed earnings. The FTSE 100 was
on the flat line at 7200 with housebuilders and banks weaker. The DAX
slipped beneath 12700 briefly before paring early losses.
But investors may be buoyed by signs of thawing in the
rather frosty EU-US trade dispute, after US commerce secretary Wilbur Ross
suggested trade talks could be an alternative to tariffs being imposed on auto
imports next month.
Wall Street finished mildly lower yesterday as US faced a
Brexit drag following the government’s defeat on the timetabling. SPX
closed south of 3k at 2996. Earnings are painting a decent picture of relative
resilience but we’re still stuck in this range around the 3,000 level.
Earnings overnight – Texas Instruments missed on
revenues and posted weak Q4 guidance. Shares fell sharply in after-hours
trading and the chipmaker is a clear drag today on sentiment. Shares in Snap
also tanked about 15% at one point in after-hours trade despite reporting a
solid Q3. Snap expects to make a profit in Q4 but not as much as analysts
Asia has been pretty mixed. SoftBank shares fell as it went
all in with WeWork. Hong Kong was lower amid reports of Beijing seeking to
replace Carrie Lam, although the legislature has now officially dropped the
controversial extradition bill. China says the reports on Lam being replaced
are a rumour with ‘ulterior motives’.