May wants it better than just a letter
January 30, 2019
After all the hype, little materialistically changed last night after an evening of amendment votes in parliament that brings the UK-EU negotiations back to a station that has already been passed. The much anticipated Yvette Cooper amendment, which would legally rule out a no-deal Brexit and include an extension in article 50 if a deal wasn’t in place by mid-February, lost in the House of Commons. This prompted a sharp sell-off in the pound as it was the only amendment out of seven that was voted on that would prompt serious sterling upside. The Spelman amendment, which is a weakened down version of Cooper’s rules out a no-deal scenario but isn’t legally binding, did pass. This did little to help sterling claw back the losses it posted after the Cooper amendment failed to get through as it only reiterated what the market already knew – that there was little appetite in Parliament for a no-deal Brexit. Further, the government-backed Brady amendment did pass which highlighted the disapproval in Parliament for the current Irish backstop mechanism but offers little insight into what the solution was to prevent a hard border. For anyone reading the news over the last few months, these themes were already apparent. The one change was that the Labour leader Jeremy Corbyn is now open to begin cross-party talks with Theresa May. Going forward, sterling waits in anticipation for the official backlash from the EU as May seeks out legally binding changes to the Withdrawal Agreement instead of mere “clarifications”. This is something that several EU officials have repeatedly ruled out already, indicating a tough journey is ahead for May.
On a day with little volatility, the euro nevertheless managed to make gains against most of the G10 currencies and even achieved its third day of minor gains against USD in a row. Tradewise the Eurozone economy may be stuck between a rock and a hard place, some fear. Trade talks between China and the US breaking down would be bad for China and other emerging markets, which will hurt the Eurozone economy as demand for Eurozone exports will go down in these economies. An agreement between China and the US may be negative as well, as China replaces a great deal of Eurozone exports by US producers, while President Trump may come after the European Union with tariffs on cars and other measures. The divide and conquer trade strategy of the US President may thus have the EU countries as the ultimate victim, forming yet another risk for the euro and the eurozone economy. Today we’ll have German Consumer Price Indices coming out all throughout the morning as the main action on the data front.
The greenback closed yesterday´s trading session in the middle of the G10 currency board as FX movements were particularly pulled by sterling’s woes. Apple´s CEO Tim Cook shared some upbeat comments about the future of the company, despite the slide in sales. This brought some relief to market participants after the warning signs perceived at the beginning of the year on the back of how weaker demand for Apple products in China could spell ill for the global economy in 2019. This evening brings us the first Federal Open Market Committee rate announcement of the year. Even when markets are broadly expecting no changes in the policy rate, most of the attention in today´s Powell speech will be centered in the following steps on the Federal Reserve´s balance sheet. Any hints concerning a potential halt in the reduction of assets on the balance sheet could be likely interpreted as a further signal of a dovish stance of the Federal Reserve. The announcement will come at 19:00 GMT while Donald Trump´s trade talks with Chinese Vice Premier start today.
The loonie eventually traded flat against its US counterpart yesterday in a muted trading session. WTI oil prices rallied back above US$53 per barrel, a move that ultimately clawed back most of Monday’s losses. It looks as if the crude market may begin to resume its slow upward trend as it factors in an additional 500,000 barrels a day output cut that will take place in the coming months. The change comes after the US imposed sanctions on state-owned Venezuelan oil company PDVSA in an attempt to drive interim President Maduro from power, and further signals the reduction in OPEC+ output this year.