11th December 2018 Market Update
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?? GBP – Having covered off the three most likely outcomes of yesterday’s vote in our previous report, naturally Theresa May decided at the 11th hour to postpone the Parliamentary vote on Brexit as she hopes to return to Brussels to seek concessions on the Irish backstop. This is because all indications pointed towards a huge defeat, which has reignited concerns about the UK’s departure from the EU in March. In terms of next steps, we see three likely outcomes following the vote postponement. Firstly, Theresa May is looking to go back to the EU in an attempt to secure further assurances on the Irish back-stop arrangement which remains the most contentious part of her current Brexit deal. Unfortunately, the EU has so far remained firm on their view that the current deal is not up for renegotiation, so this is likely to prove an unfruitful use of May’s time. A second possible ramification of the vote postponement this week would be a vote of no confidence in the government which is likely to be triggered by the Labour government as mentioned in yesterday’s analysis. And finally, we could yet see a Conservative leadership challenge if the necessary 48 letters are collected from Tory MPs supporting the view that May’s leadership is no longer in the party’s best interest. This has been an ongoing threat for the past few months, but given the PM’s latest move – calls for a leadership challenge will inevitably grow. Whatever happens, going forward, yesterday saw the Pound slump 1.6 per cent against the Dollar to its lowest level in 20 months, while against the Euro it fell 1.5 per cent, to hit its lowest level since August. One thing is for sure – the increasing Brexit uncertainty will keep Sterling volatile in the coming week.
?? USD – The Dollar was slightly weaker this morning following the news that China and the US were preparing the next stage of their trade talks, which served to reduce the amount of ‘safe-haven’ demand for the greenback. As part of this, Chinese VP Liu He, US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer spoke on the phone to discuss the likely shape of their trade talks. As a reminder, the two parties have until March 1st to come to an agreement after Donald Trump and President Xi Jinping agreed to keep tariffs at 10% on Chinese imports, as opposed to increasing them to 25% on over $200bn worth of Chinese goods. The markets had feared that the US arrest of Huawei Technologies CFO last week over a breach of sanctions rules would derail trade talks, but apparently, they do seem to be progressing. As such, investors are pulling their money out of the Dollar and reinvesting it in more risky options, which is causing the Dollar to soften. This latest progress seen in the trade talks comes after the Dollar suffered its steepest weekly drop for three months versus a basket of currencies last week as traders increased their expectations that the Fed might pause their interest rate hike cycle after this December’s meeting.
?? EUR – Yesterday, France’s government were forced to cut their forecast for economic growth in Q418, as riots continue to sweep across the country. The ‘gilets jaunes’, or ‘yellow vests’ who initially began protesting on a proposed ‘green’ tax on fuel, are now involved in a fully-fledged anti-government movement which has led to rioting across France, especially in the country’s capital of Paris. As a result, the protests have supposedly already cost retailers around $1bn of pre-Christmas sales, and some predict that the overall losses will add up to over $11bn. As a result, economic growth forecasts were halved from 0.4% to 0.2% in Q4 of this year. In addition, French President Emmanuel Macron has offered concessions on €10-12bn to address France’s state of emergency. In terms of how this might affect Europe as a whole – some analysts suggest these concessions will increase France’s budget deficit to 3.6 percent next year. This is something that officials in Rome are likely to be keeping an eye on given the ongoing tensions between themselves and the European Commission who have sought to keep the Italian GDP budget deficit at less than 2 per cent. One thing is for sure, Europe is currently unable to sell itself as a fruitful investment destination right now, which will keep the Euro underbid going forward. This is as Brexit negotiations continue to weaken the single currency.
GBP: May postpones Brexit vote at the 11th hour, causing Sterling to fall off against all major currencies;
USD: Dollar being led by trade tensions with China as well as likely interest rate hiking path;
EUR: Macron gives in to anti-government protesters as France’s budget deficit looks likely to soar.
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