Theresa May Has Pulled Out Her Final Trump Card
Pepperstone | Mar 14, 2019 01:00AM ET
It's all Brexit, Brexit, Brexit, and while everyone is exhausted of the news flow, it’s refreshing that we have some vol in G10 FX markets.
It’s worth exploring if this weakness in the USD Index gets some legs, but with little in the way of tier-one US data on the docket today we may see a few recent USD sellers taking profits. We see good interest in EURUSD, and while we hear calls for a move into the February highs of 1.14, there seems to be better supply seen in daily and a move into the 1.13-handle looks likely.
Gold in USD terms, (XAUUSD), has found a bit of form, partially because of the recent USD weakness, but also because the total USD value of outstanding bonds with a negative yield has pushed to the highest levels since December 2017. As has been my thesis for a while, gold has been bought as a hedge against global economic weakness, with a flatter yield curve, and an ever greater pool of negative yielding bonds a clear sign of that. Happy to be in the bullish camp on gold for now, where the main real threat for gold bulls would be a clear change in the economic landscape.
Around Asian markets today its been a fairly quiet day, with little reaction seen to China data, where noticeably, February industrial production grew at 5.3%, which was a marked slowdown from the 6.2% seen in January. New year effects were cited. As I focus on in the video, in equity land the clear focus is on the S&P 500 and whether we can see a convincing break of 2820. In Australia, I question what it would take for investors to hold the confidence to pay over 16x for the ASX 200 Index.
We find earnings expectations (EPS) have held in firm of late and at $4.00, so should investors find the confidence to pay over 16x, we see the index into 6400.
It’s all GBP though, and after two failed Meaningful Votes, Theresa May has brought out her final trump card and effectively put a metaphorical gun to the heads of the 391 MPs who voted against the second Meaningful Vote witnessed on Tuesday.
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Whatever happens, Britain will not leave the EU on 29 March
This morning, the UK government announced that the House of Commons would have yet another vote on May’s deal by 20 March – the day before the two-day EU (European Union) Council meeting commences, and should the deal pass this time, then the UK will formally request an extension for Article 50 until 30 June. This is effectively the latest the UK can extend without technically having to be part of the European Parliamentary elections.
Should a third vote fail by 20 March, and recall May still needs to claw back a 149-vote deficit, then Article 50 will be extended, but the duration will be dictated to by the EU. Most except the EU to grant an extension for two years, which is obviously a long stretch and will not sit well with the UK camp. A two-year extension will not only breed even further uncertainty for British business and weigh on UK economics, but will likely come at a cost, with the UK likely to have to increase its already punchy divorce settlement of £39b. It would also increase the prospect of a second referendum, a vote of no-confidence in May’s government, which again could lead to a general election. All routes the Brexiters, such as the European Research Group (ERG), do not want to see as they could ultimately result in the UK remaining in the EU.
h3 As good as it gets?/h3So, as long as we believe the EU will accept a formal request to extend A50, to either a June or two-years, in either situation, a no-deal Brexit has been temporally taken off the table – a clear GBP positive. It also incentivises the no deal Brexit camp to perhaps vote for the current deal, because the EU will not come back to the table with further concessions. This could be as good as it gets for them.
GBPUSD has been at the heart of our client flow of late, with price hitting 1.3374 – the highest level since July 2018, although we are now seeing profit taking. EURGBP has tested 0.8500 – the lowest levels since May 2017, while GBPAUD should be on the radar, with price threatening to break above the 7 October high of 1.8728. Either way, all paths have led traders to price out the prospect of a no deal Brexit, but there is still water to flow under this bridge before 20 March.
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