Sterling buyers still in control, European equities firmer

Morning Note

It’s a massive week for the pound and for Brexit. The PM suffered a setback on Saturday and was forced to send the dreaded letter to Brussels asking for an extension, but left it unsigned and sent another (signed) missive saying delay is disaster.  

It looks like Boris Johnson will make another stab at winning parliamentary support for his Brexit deal.  We need to see if Speaker John Bercow allows it – his record on frustrating Brexit is well known.  Otherwise the government will bring forward implementation legislation quickly to drive through the bill in time so that a delay is not required. The government thinks it has the numbers for the deal in its raw form to pass. 

Sterling remains vulnerable to significant price swings but has yet to make any real shift off the back of the weekend’s votes. Traders had anticipated a volatile open down under, but we’ve not really seen anything too drastic so far. GBPUSD fell a touch to trade a little below last week’s highs, but buyers hold control above 1.29 and subsequently pushed it up to 1.30. 

The pound’s price action and resilience in the face of the defeat for the PM on Saturday shows the market remains constructive on a deal being agreed, whether it’s now or sometime in the coming weeks. No deal risks appear to have diminished but there is, without approval of the deal and approval of all the required steps to make it reality, still a strong chance of no-deal come Oct 31st.  

Elsewhere, the euro remains bid against the dollar with EURUSD starting to build upside momentum with a break above the 100-day moving average at 1.1160. Next stop is the 38% retracement of the move up from the 2016 lows to the 2018 highs around 1.190.

European markets were firmer on the open with the DAX and FTSE 100 both +0.4%. The DAX in particular is flirting with a key level as it attempts to break out above the July peak and cement its two-year highs north of 12700. US markets had closed weaker on Friday with Boeing and Johnson & Johnson leading the Dow south by 1%. The S&P 500 was off by 0.4% at 2,986. A slew of earnings are due this week – these will be key for shaping our view of just how much the consumer is starting to suffer from the trade war. Last week’s reports were broadly positive.

Banks and house builders on the FTSE evinced market confidence that no deal risks are lower – either we get a deal done by Oct 31st or there will be some kind of delay, confirmatory referendum etc.  RBS, Lloyds, Barratt Developments and Persimmon all up more than 1%. After a tentative open, the FTSE 250 rallied 70 points off Friday’s close as investors seemed to see the Brexit cup half full.