Volatility likely in light of tomorrow’s Vote

10th December 2018 Market Update

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?? GBP - So after all the build-up, Prime Minister Theresa May’s Brexit deal will be put to Parliament tomorrow for a vote, with all signs suggesting that it will be rejected by MPs. As such, we have summarised the most likely outcomes as follows. The first thing to analyse will be ‘1. How large is the loss?’ with reports suggesting that as many as 100 Conservative MPs may be prepared to vote against the deal, alongside the majority of the opposition. The reason this is important is – the larger the defeat, the harder it might be to get an amended deal through the second time around. Secondly – ‘2. Could we see a new Tory Party Leader?’ as any loss would increase calls for a leadership challenge; this is something May might survive as it would require 150+ Conservative lawmakers to agree to her removal. The alternative is she may resign but this seems unlikely given her previous tenacity to see things through. And Finally – ‘3. A No-Confidence Vote in Government’ is likely to be instigated by the opposition parties. As part of this, it is unlikely that the DUP or the Conservative will vote the government out of office – but if it were to pass, then a new government would have to be formed within 14 days, while any failure would trigger a general election. Whatever the result of the vote, and its impact going forward – volatility is likely to be the only guarantee, as part of which our customers are encouraged to work limit orders as sterling rates have every chance of shooting up or shooting down.

?? USD - The dollar has recovered slightly this morning after weakening off over the weekend as markets lowered expectations on the pace of Federal Reserve rate hikes in 2019; this was in the wake of the market turmoil we saw last week. As part of this - Wall Street ended its worst week since March on Friday following a selloff triggered by concerns over a slowing economy and mounting trade war fears. In addition, Fed Chairman Jerome Powell said that U.S. interest rates were nearing neutral levels, which markets interpreted as signalling a slowdown in rate rises next year. The dollar weakness was compounded by data out on Friday which indicated that the U.S. economy created fewer-than-forecast new jobs in November, while October’s figure was revised lower. Wage growth rose in line with forecasts, keeping the Fed on track to hike interest rates this month but the report indicated that the labour market may not be as strong as hoped, easing pressure on the Fed to keep hiking rates in 2019. Saying that - the US economy continues to run hot as intensifying wage pressure and the likelihood of increased tariffs remain high which should keep core inflation grinding higher with the annual rate expected to increase to 2.2% YoY. Away from inflation and interest rates – the market will be keeping an eye on the US and China’s ongoing trade dispute which was fanned by White House trade advisor Peter Navarro’s comments on Friday that US officials would raise tariff rates if the two countries could not come to an agreement before March 1st.

?? EUR - In the Eurozone, growth is the main concern with the next big data point coming on Wednesday in terms of October’s industrial figures which will provide an important indicator on the state of the economy. Following that, the big event this week is Thursday’s ECB meeting which will not only be the last meeting of the year but will also be a historic meeting as it should mark the end of the ECB’s three year, €2.6trn net asset purchasing programme - which has been a key stimulus to injecting money into the Eurozone economy. As part of the meeting, the ECB will also release updated growth forecasts, which investors expect will be lowered after an exceptionally weak third quarter, as the region’s economy struggles to cope with global trade conflicts, Italian politics and ongoing Brexit negotiations. This morning, the Euro has benefitted from both dollar and sterling weakness, both of which have been explained above.


GBP: Possible Brexit vote outcomes explored as investors await Tuesday’s all-important vote on Theresa May’s deal;
USD: Dollar on the backfoot following weaker than expected job growth figures, despite strong wage growth helping to keep inflation above Fed target;
EUR: Growth the main concern, while this Thursday’s ECB meeting likely to bring an end to 3 year, €2.6tn Quantitative Easing programme.


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