Double-edged sword for Labour
April 3, 2019
Sterling erased all of its losses last night to eventually trade in the green after Theresa May yet again reiterated how small the likelihood of a no-deal exit is. The PM’s address to the nation outlined the next steps for Brexit, which included appealing to the EU for another short extension and reaching out to the opposition party leader to build a cross-party deal. Despite May’s withdrawal treaty not up for debate, the political declaration which outlines the future relationship with the EU remains up for grabs, however, Corbyn must proceed with caution as the consequences of his next action could be dramatic. Many political pundits have raised concerns over last night’s move by Theresa May as a precursor to a general election. Should Corbyn build a cross-party deal that does not include a second referendum, he will be under severe pressure from the remainers after he helped facilitate Brexit. Meanwhile, any rejection of May’s olive branch would see Corbyn deliberately block Brexit and force a long extension in A50. The latter seems like the most likely option in our view, which remains consistent with the Brexit status quo, but leaves the pound facing a possible general election in the near future as the Tories attack Corbyn’s unwillingness to deliver the people’s verdict. For this reason, today’s Prime Ministerial Questions will be watched with increasing scrutiny as May and Corbyn go and cross swords in front of the media.
EUR came scaringly close to a fresh 21-month low against USD yesterday after growth concerns had the single currency soften for the sixth day in a row. Maybe coincidentally, but over the same period yields on Italian 10-year government bonds climbed as the country will see the fiscal deficit expanding, while growth forecasts move the other way. This may have been in Jean-Claude Juncker’s mind yesterday as the European Commission’s president noted current Italian budget deficit predictions are based on a projected growth of 1.2% for 2019, which at the moment seems unattainable. Currently, the country’s economy is in a technical recession, while the Organisation for Economic Cooperation and Development estimates the country’s economy will contract by 0.2% this year. Today European Final Services Sector Purchasing Manager Indices will keep us occupied, being released for individual countries throughout the morning. This results in the Eurozone-wide reading at 8:00 BST, followed by the Retail Sales at 9:00.
The DXY dollar index reached the highest point in more than three weeks yesterday as further warnings about a global growth slowdown make US growth look attractive in comparison, though the move unwound somewhat this morning. The European Union is allegedly drafting a document to warn other G20 countries how trade tensions are putting global growth at risk, while the International Monetary Fund is chipping in by saying global growth has lost momentum. Durable Goods Orders meanwhile underperformed the expectations, growing a mere 0.1%. The February print was lowered by the aircraft component, but as the monthly data is quite volatile, it best not to read too much into this about the state of the US economy just yet. Today the focus will be squarely with the ADP Non-Farm Employment Change Estimate at 12:15 BST, and the ISM Non-Manufacturing PMI at 14:00.
The loonie fell victim to another broad swathe of US dollar strength yesterday but has already reversed all of the losses in this morning’s session. Today the Department of Energy releases crude oil inventory data for last week in the US where a 590,000 barrel drawdown is expected. OPECs lowest production of crude in February since 2015, coupled with falling rig counts in the US, bodes well for the crude rally which continues to surge above the $62.50 level.