Another 12 months of May?

December 13, 2018


After initially taking a beating on the announcement that Prime Minister Theresa May would face a vote of confidence from within her own party, sterling began to rally throughout the day, as markets reacted optimistically to May’s combative promise to fight on. The market’s expectation that she would win the vote was later confirmed- something that has been a rare feat over the last few years- though sterling’s strength plateaued thereafter. Despite another chapter of the Brexit saga being closed last night, and the threat to May’s leadership from her party dissipating for 12 months, much of the book is yet to be written. The question now arises: where next for May? The likeliest option is that the Prime Minister will wind the clock down, like a professional footballer protecting a 1-0 lead in the corner flag, and attempt to force the meaningful vote in a ‘my deal or no deal’ scenario around January time. The threat of the UK crashing out of the EU without a deal, and according to the Bank of England setting off a recession worse than 2008, may prove sufficient in forcing enough of the 117 rebels to support her deal. However, Labour may taste blood in the water and along with the Brexiteers, a rebellion from the DUP if no fudge on the backstop is forthcoming, and the riled up SNP, Corbyn could call a vote of no confidence in the House. He would need a ⅔ majority to prompt a snap election, meaning many of the Tory party who lost faith in May’s leadership would also need to support this motion. This scenario, therefore, remains a tail risk, but in the current political climate, it certainly can’t be ruled out.


White smoke coming from Rome signalled the Italian government may be willing to keep their budget deficit at 2%, a sacrifice that reflected well on the euro and prompted it to rally against most major currencies. The story is far from over, however, as the Italian Prime Minister Giuseppe Conte was quick to react that talks with the European Commission have not even started yet and it is too early to discuss figures ahead of time. Given that the French are also planning to ramp up their budget deficit, according to the new spending announced by President Emmanuel Macron, the Italians may have found an ally in their resistance against the European Union Budget rules. Today at 12:45 GMT the European Central Bank will issue a rate statement, followed by the closely watched press conference at 13:30. Risks seem to point overwhelmingly to the downside, although the highest wage growth in a decade in Q3 may be enough to have the ECB see through this, end their Asset Purchasing Program this year and have their first rate hike before the end of 2019.


The dollar stayed uncharacteristically out of the spotlights yesterday as the vote of confidence on Theresa May and Italian budget pledges prevailed in markets. This lack of attention did not serve the greenback well, apparently, and it sold off against most of the G10. China, meanwhile, taught us something about perspective, as they pushed back their “Made in China” program by a decade to 2035 with ease. This diminished trade tension as this program was a thorn in the side of the US, as they consider it a threat to the US as China uses it in their strategy to dominate high-end technologies. The Core Consumer Price Index came out exactly at target for November at +0.2% in the background of all of these developments, causing no further shocker in markets.


Yesterday’s crude rally spurred the loonie on to make gains against a broadly weakening dollar, but as crude prices dropped off the damage had already been done to the greenback. Oil prices dropped off after US inventories didn’t fall as quickly as the market expected following on from the OPEC supply cut.

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