May hits brick wall in Brussels
December 14, 2018
Yesterday saw a rare event in the U.K. – a muted day of Brexit headlines, despite Theresa May meeting with the European Council. News broke this morning, however, that May made little progress. Indeed, after leaving the room following an hour-long presentation, EU leaders decided to scrap plans for formal reassurances on the backstop mechanism, until May made up her mind on what she specifically wanted. For sterling, this came as no shock and merely reiterated the hard task May has going forward. Calls from the Labour party for the government to hold the ‘meaningful vote’ on the draft Withdrawal Act continue in abundance, especially given May’s inability to strike further concessions from the single market. Today, May remains in Brussels, in an attempt to make some concrete progress to take back to Parliament.
Yesterday saw intraday weakness after the European Central Bank Rate Announcement and press conference, but it seems like nothing but a short sneeze now as the single currency quickly recovered afterwards, ending the day only very marginally softer. The ECB downwardly adjusted its growth and inflation forecasts, but as this was broadly expected, the impact this had on markets was limited. A bigger blow came when ECB President Mario Draghi admitted during the presser that the balance of risks is “moving to the downside”. However, he pulled another fine balancing act out of his hat when he later framed this as “continuing confidence with increasing caution”. This can be interpreted as the ECB still being confident about the prospects for Eurozone growth, though simply less so than before. The European Council meeting that started yesterday will carry on today, potentially delivering some headlines as a to and fro between the European Union and the Italians about their budget finds a podium. Flash Manufacturing and Service Purchasing Manager Indices are set for release at 9:00 GMT.
The US-China trade outlook brightened yesterday after it was confirmed that a trade deal for the Chinese to buy 1.5 to 2 million metric tons of US soybeans was confirmed, appeasing President Trump and his heartland supporters for now. The US dollar nevertheless continued to be firmly nested in the middle of the G10 currency pack, indicating the impact of trade war headlines is starting to become ambiguous for USD. Rising tensions in theory still lead to safe-haven flows into the dollar, but as the trade turmoil also damages supply chains in the US, the effect has not recently always been as clear. Today sees Retail Sales at 13:30 GMT as the most important US data release, which will tell us more about whether the economic growth has peaked in the US.
The loonie continues to teeter on 18-month lows due to the crude market failing to make a sustained rally despite OPEC’s supply cuts. The cuts have not proved sufficient yet to see the glut in supply become soaked up by demand. Questions over slowing global growth, an increase in US Shale production if prices rise, and stability in the middle east has stopped oil markets making a realistic break.