Brexit Day delayed as UK gears up for another General Election
Today was supposed to be Brexit Day. Instead the whole thing is on pause for another three months while the UK holds another General Election.
We’ll soon be entering the government’s quiet period, known as purdah, during which Downing Street won’t be announcing any major new policies that could influence the campaign.
Sterling is also facing a quiet period as well. The diminished threat of a no deal Brexit – for the time being – is providing solid support, but the upside is limited due to the political uncertainty.
Over the past few days cable has bounced between 1.28 and1.30, but there was a Fed meeting driving the dollar and the pound’s contribution to the volatility looked limited.
The deal on the table makes all the difference
We’ve been expecting an election for weeks now, and the upcoming poll is very different from a market perspective than it would have been if it had been held a couple of months earlier.
Boris Johnson managed to renegotiate Theresa May’s withdrawal agreement, replacing the backstop with something he claims is more palatable. The DUP don’t like it, however, and they’re not alone.
What’s important here is that if Boris gets to return to No.10 with a solid majority it’ll be his withdrawal agreement bill that he attempts to implement. This is a much better outcome for cable than the no deal Brexit he seemed intent on pursuing when he won the leadership contest.
Labour seems less market friendly no now deal off the table
For a while it looked like markets might have been relieved by the prospect of a Labour government due to its aversion to a no deal Brexit.
Back when Boris was talking about no deal, Labour was pretty tight-lipped about what exactly it wanted. Jeremy Corbyn has since come out in favour of a confirmatory referendum on a Brexit deal.
The political landscape has shifted away from a no deal Brexit. A Conservative majority may not be the downside risk it was once perceived to be. Labour still has the more market-friendly Brexit policy, but the Conservative alternate is not nearly as unpalatable as it once was. All parties in this election (other than the Brexit Party) are now offering to avoid a no deal exit.
This may free up traders to look a bit longer term and take into account Jeremy Corbyn’s radical plans for shaking up the system.
What are the risks of a hung Parliament?
The latest YouGov poll shows the Conservatives hold a 15-point lead over Labour at 36%, while Labour, at 21%, are just three points ahead of the Liberal Democrats. But it’s vital to remember that the Conservatives were polling at 44% the day before Theresa May called her disastrous 2017 election. Boris is by no means going to walk this one.
While another huge surge for Labour can’t be written off, perhaps the bigger threat comes from Nigel Farage’s Brexit Party. It could hoover up the votes of both Tory and Labour Leavers, weakening both parties. The other parties have given them the perfect campaign materials; Boris broke his own promise to ‘get Brexit done’ by October 31st, and Labour and the Lib Dems both want a second referendum.
Rather than looking at one established party dominating the others, this could be an election that sees the Brexit Party squeeze its way into Parliament, leaving no one with a majority. Not only would this promise many more months, if not years, of further chaos, but it would also put a no deal exit firmly back on the table, especially if hardcore Brexiters in the Tory party make alliances with Nigel Farage.
There really is a lot to play for, and the outcome will have huge implications for the UK’s future. But until we get more polling data and the candidates start doing things that are seen to dramatically alter their chances, the pound will be paralyzed by uncertainty.
Cable softens as UK nears general election – and that’s when the real pain begins
Markets usually know what to do in a general election – hope a right-leaning party takes the day. But what happens when the socialists are the ones who could have the best approach to the economy?
In other circumstances, Boris Johnson would be the perfect election candidate. Sterling would surge on expectations that he would stroll comfortably to a majority. He’s charismatic, respected by many, and is facing up against Jeremy Corbyn – the perennial fence-sitter who struggles to keep his own party united.
But, as far as the markets are concerned, the current Prime Minister has a major flaw. He seems determined to take the UK out of the European Union without a deal on October 31st. He may make claims to the contrary, but his extended proroguing of Parliament and his refusal to budge on the Irish border backstop make negotiating and ratifying a new deal virtually impossible.
GBP/USD rallies hard after Boris Johnson Parliamentary defeat
It was for this reason that Sterling rallied hard this week as the opposition, with the support of 21 Conservative rebels, forced through a bill that would allow them to take control of the Parliamentary agenda and table new legislation obligating Johnson to get an extension.
Cable shot up 1.3% in overnight trading, and pushed 0.6% higher the following session to rebound from “flash crash” lows to its highest levels ($1.2350) in nearly six weeks. EUR/GBP was forced lower, falling from €0.9080 to €0.8940.
Johnson responded by calling for a snap general election, but his efforts were thwarted. Labour abstained from the vote, meaning the motion failed to receive the two-thirds majority required.
Parties fight over election date, but a vote is coming
So, we currently have Boris Johnson, who has repeatedly stated he doesn’t want a general election, desperately pushing to dissolve Parliament. He’ll try again on Monday with another vote. Meanwhile, Jeremy Corbyn, who has been calling for an election for months now, has refused the offer.
Welcome to Brexit politics.
There will be a vote though, the question remains when. Labour and the Liberal Democrats want to ensure the new legislation that prevents a no deal exit has been passed before they agree to a vote. Otherwise Johnson, who would have the power to set the actual date of the election, could simply opt for November 1st – after the UK has left the EU. It’s for the same reason that Johnson is so keen to get the opposition to agree to it now.
Even that isn’t the end of it. There’s a risk for the opposition in waiting for an election. If Boris Johnson does set the voting date after the UK’s departure, he will have been the Prime Minister who successfully delivered ‘the will of the people’. Boris couldn’t ask for a better string to his electoral bow.
Markets forced to choose between anti-economy and anti-business
But those are problems for the parties to concern themselves with. The issue for markets is do they back anti-EU Johnson, or anti-business Corbyn? In this poll, both candidates threaten the UK economy.
The business world has been largely outspoken against a no deal exit – if it does deal huge economic damage, a pro-business Conservative might not be enough to repair the damage.
But is it better to soften Brexit and then leave the nation in the hands of Jeremy Corbyn, a man who intends to completely transform the economy anyway? His plans include nationalising rail, water, electricity and mail companies. He wants to increase taxes for the rich, vastly increase public spending, and redistribute powers from corporations to workers.
Again, in a straightforward election, this would be a simple call for the markets: go for the man who doesn’t want to come after their investments. But, although Corbyn has them firmly in his crosshairs, he is at least committed to keeping as much of the status quo in terms of trade intact for business as possible.
Are markets comfortable to have the same percentage of a smaller pie, or a smaller percentage of the same pie?
Markets fall quiet ahead of US jobs data, UK seeks longer Brexit extension
Market activity has cooled today as traders across the globe await the latest non-farm payrolls report from the US. Last month’s data showed a severe undershooting of forecasts, with jobs creation clocking in at just 20,000 compared to the 175,000 consensus. But wage growth was solid and unemployment dropped back below 4%, making the headline jobs number easy to dismiss as a blip.
But private American payrolls data from ADP – which traders have often believed serves as an indicator for the NFP result – delivered a big miss this week. Markets are now bracing for another soft jobs number. The Federal Reserve has already paused its plans to continue hiking rates, with the dot plot shifting lower and markets already pricing in odds of a rate cut this year. Another set of dire jobs numbers, combined with pressure from the White House to begin cutting rates straight away, could make it hard for the Fed to avoid committing to a much more dovish policy trajectory.
Just keep an eye on wage growth – a tight labour market should be delivering strong pay increases. A solid performance here could soften the blow of any downside surprise in the jobs numbers, especially as a late-stage economy will naturally struggle to keep adding jobs. A 49-year low for US jobless claims in the previous week also suggested that the labour market remains on good form.
UK prepared to participate in European Parliament elections in exchange for longer Brexit delay
GBP/USD is holding firm just below $1.3100, with traders reluctant to bid sterling higher despite the news that Theresa May has requested another Brexit extension. This time the UK is seeking to push back the official exit date until June 30th. The past week has been a good one for those betting against a no deal exit – cross-party talks and a further delay have both cut the odds of a hard Brexit.
However, there are two reasons not to get too optimistic on sterling.
Firstly, sterling so far has been largely unperturbed by the significant risk of a no deal before this week’s developments, so optimism is largely priced into cable already.
Secondly, May and Corbyn might be able to reach a consensus, but given the leaders’ strenuous relationship with their respective parties, there is still no guarantee that even a joint deal can make it through Parliament.
This delay is unlikely to go down well with Brexiters, especially as it means fielding candidates in the European Parliamentary elections – expect there to be little goodwill in Parliament towards May and her new deal.
Equities hold near highs – NFP overshadows talk of incoming trade deal
Equities are similarly shielded from the latest tailwinds by the proximity of NFP figures. President Donald Trump yesterday stated that a trade deal with China could be concluded within four weeks, with President Xi Jinping calling for talks to conclude earlier.
Global equities are soft for now, but are still on track to close on a solid footing. The STOXX 600 index is on track for its best performance in almost three weeks, while the DAX hasn’t fared this well since December 2016. Gains for the S&P yesterday saw the index notching the first six-day winning streak since February 2018.
Brexit compromise, dire PMIs, a lift for Facebook and a drop for Lyft
Facebook up on Deutsche Bank Instagram note, Lyft receives first “Sell” rating
Despite the negative news-flow swirling around Facebook as it battles concerns over privacy and extremist content, stock has continued to climb today, registering a 3.3% gain. A new note from Deutsche Bank states analysts believe that Friday’s addition of a Checkout on Instagram feature for the image-sharing platform could bring in revenue of $10 billion by 2021. Facebook is currently trying to move away from its reliance on ads, which currently generate 98% of revenues.
Finding alternative revenue streams is important for the company as it faces pressure to clamp down on who it is allowing to advertise, especially as the platform comes under scrutiny for the role of paid ads during elections and other political events.
At the other end of the spectrum is Lyft, which yesterday closed below $69.00; under its IPO price. The stock has been hit by its first “sell” rating. Michael Ward of Seaport Global has set a target price of $42 per share, claiming the current price represents a “leap of faith” in the willingness of consumers to forgo car ownership in favour of ride-hailing services.
Executives at rival ride-hailer Uber may not be looking forward to their upcoming float as much now. Lyft’s performance could significantly dent the price investors are willing to pay; it seems that holding a company valued at many times earnings and yet to post a profit isn’t quite the golden opportunity many first believed.
Looking at the wider markets, sentiment remains positive after fresh signs that the US and China are nearing a deal to end the months-long trade war between the world’s two largest economies. Recession fears are easing and global stocks climbed to six-month highs, while a move out of safety pushed the German ten-year yield back above 0%.
Asian shares hit a fresh seven-month-high, with the Hang Seng up 0.9% to break above the 30,000.00 handle before consolidating around 29,950.00, and the Nikkei 225 up 1.3% to flirt with 21,800.00.
European shares are also higher; the DAX has registered a 1% gain. Signs that the UK government may be moving towards a softer Brexit have helped nudge the FTSE up nearly 60 points; resistance remains around 7,400.00.
Cable caught between Brexit compromise and service sector stumble
Having exhausted all other Brexit options, Theresa May last night announced that the UK needed another short Article 50 extension, and extended an offer of talks to Labour leader Jeremy Corbyn. May still doesn’t want the UK to take part in European Elections, but wants to avoid a no-deal Brexit; currently scheduled for April 12th.
It marks a significant change in strategy, and cable responded positively. Sterling was up 0.5% against the dollar this morning, but gains were trimmed following a dire reading from the March services PMI. Analysts expected the reading to drop from 51.3 in February to 50.9, but the sector instead recorded a contractionary 48.9.
Taken together, the PMIs are waving a red flag for the UK economy. Only the manufacturing sector continues growing, and that is because of companies stockpiling ahead of Brexit.
The uncertainty facing businesses is an anchor on the UK economy, but can May and Corbyn craft a deal between them that appeases Parliament? The move certainly signals the Prime Minister is ready to consider a softer Brexit, but will anyone buy it?
During normal times, a consensus between Conservative and Labour leaders would have a strong chance of uniting the house. But we have to remember the circumstances and the leaders in question. Tories aren’t likely to vote for anything with Corbyn’s fingerprints on, while the Labour party isn’t exactly Corbyn’s biggest fan either.
Cable remains higher – a deal that potentially avoids further economic damage is clearly better than no deal that threatens even more (so markets believe). A soft patch for the economy can be overlooked if things get cleared up quickly, and hope this is the case has kept GBP/USD supported around $1.3175.