Sterling stabilises after steep fall, European equities open weaker

Morning Note

The pound dropped sharply after the latest Westminster drama but is firming up this morning. Against the dollar sterling was off 1% from Tuesdays highs near 1.30 at 1.2870, having tripped as low as 1.2840 overnight. It’s lost the 10-hour moving average at 1.2906 which may now form a resistance point.

The pound remains the proxy for the Brexit process and it’s displaying nervousness that Parliament still can’t get its act together and see a deal through. Uncertainty prevails for the time being, but Parliament has backed a deal and that feels like a key moment.

The government passed its Withdrawal Agreement bill comfortably but lost its way with the timetable. MPs chose to pull the handbrake on the government’s breakneck pace of legislation and blocked the program motion. Taking time out, the government chose to pause the bill – but did not abandon it altogether. Importantly, Boris Johnson said that the UK would leave the EU with this deal come what may, but did not stick to his Oct 31st do-or-die mantra.

This could be an important, indeed key, shift in the government’s position as it indicates a willingness to extend and then seek to get the bill through Parliament. The mood of the government seems to be to get the EU to approve a 3-month extension and call a General Election. Donald Tusk has called on EU leaders to back an extension. France is unhappy about any delay, Germany says they want to know why they should extend. The truth is the EU will extend, the question is the length as that depends on the purpose. As we said last night after the vote, with Parliament agreeing to the WAB in principle, the EU may only back a short delay to get the deal agreed. However the Benn Act specifies three months and therefore that would tend to be the default – individual EU countries would need to argue why it should be shorter. European leaders may be uncomfortable about what could lie ahead if they enable an election.

And the problem remains for the government that holding a General Election having failed to ‘get Brexit done’ will be oxygen for the Brexit Party and could split the pro-Brexit vote. The other risk though is that this unreliable Parliament throttle the bill with amendments and then the government is forced to pull it and seek further delay and an election. One sense Boris’s political capital would have run pretty thin by that point. Safer to use the lead in the polls and the promise of this deal to hold an election before Christmas.

And even if this deal does get through sooner or later, there is plenty of scope for ongoing volatility in the pound as we would quickly be looking ahead to the end of the transition period. Britain and the EU have until Dec 2020 to agree their new trade deal, but the UK could ask for an extension by Jul 2020 if required – i.e. if it does not look like a deal can be done in time. The mere fact though that we are talking about this now is an encouraging sign for pound bulls.

Elsewhere, European equities have softened a touch in the wake of the Brexit uncertainty and some mixed earnings. The FTSE 100 was on the flat line at 7200 with housebuilders and banks weaker. The DAX slipped beneath 12700 briefly before paring early losses.

But investors may be buoyed by signs of thawing in the rather frosty EU-US trade dispute, after US commerce secretary Wilbur Ross suggested trade talks could be an alternative to tariffs being imposed on auto imports next month. 

Wall Street finished mildly lower yesterday as US faced a Brexit drag following the government’s defeat on the timetabling. SPX closed south of 3k at 2996. Earnings are painting a decent picture of relative resilience but we’re still stuck in this range around the 3,000 level.

Earnings overnight – Texas Instruments missed on revenues and posted weak Q4 guidance. Shares fell sharply in after-hours trading and the chipmaker is a clear drag today on sentiment.  Shares in Snap also tanked about 15% at one point in after-hours trade despite reporting a solid Q3.  Snap expects to make a profit in Q4 but not as much as analysts had thought.

Asia has been pretty mixed. SoftBank shares fell as it went all in with WeWork. Hong Kong was lower amid reports of Beijing seeking to replace Carrie Lam, although the legislature has now officially dropped the controversial extradition bill. China says the reports on Lam being replaced are a rumour with ‘ulterior motives’.