Will May's deal end up in the bin again?
16:45, 12 March 2019 · By Michael Hewson
After last week's heavy falls, equity markets managed to regain their footing yesterday, helped by a combination of M&A on both sides of the Atlantic and optimism that some form of progress on a Brexit deal may well be taking shape.
In the wake of their worst weekly decline this year, US markets posted their biggest one-day gain since January, merely serving to reinforce how schizophrenic market sentiment can be from one day to the next.
Corporate stories helped drive sentiment, from Boeing's biggest one-day decline since 9/11, to reports of an Apple event on 25 March, as tech stocks drove a strong rebound in the US, with Asia markets following suit. This is likely to translate into a fairly positive European open, though the FTSE 100 could well lag due to strong gains in the pound overnight.
It's yet another crunch day for the pound today, with the prospect of another so-called meaningful vote on the prime minister's Brexit deal late this evening. Sadly, the adjective "meaningful" has been hijacked in recent weeks by politicians seemingly more interested in grandstanding than actually doing what's best for the country.
Despite yesterday's optimism and the 200-point round trip for the pound from its Asia lows on Monday to a 1.3170 high, the bar to an outcome that prevents a no-deal Brexit still remains a high one, a fact that a lot of MPs seem to be oblivious to. There has been a great deal of speculation about what concessions, if any, the prime minister might be able to wrangle from her meeting with Jean Claude Juncker in Strasbourg, with talks of a statement that stipulates that the backstop is temporary alongside ambitions for a trade agreement.
These concessions appear to be in the form of additional documents which include a joint instrument that confirms the EU cannot trap the UK indefinitely inside the Irish backstop. The document is said to commit both sides to best endeavours, good faith and is legally binding in terms of replacing the backstop with a fully-fledged free trade agreement. It is also said that an arbitration panel that will rule on the use of the best endeavours clause to support any UK complaint that the EU is not negotiating in good faith.
A lot will now depend on the attorney general Geoffrey Cox whose previous legal advice warned that the UK could become trapped in the Irish backstop indefinitely. If last night's amendments or clarifications are enough for him to change his mind then the deal might get enough votes to pass, though it remains a big 'if'.
It seems unlikely that these concessions will be enough to satisfy the Brexiters in the European Research Group, and even if they were, there appear to be a sizeable number of MPs on the remain side of the debate who dislike the deal just as much, and would vote it down as well in the hope of stopping Brexit completely.
In the event the deal is voted down there appears to be growing optimism that somehow MPs will then be able to move on to a vote to remove the option of a "no deal" Brexit from the table, while extending the negotiations until at least 20 May, though this would have to be agreed to by the EU as well.
Ultimately no one really knows how events are likely to play out over the course of the next few hours, with speculation ranging from a new PM, a push for another referendum, a no-deal outcome or even the remote possibility that the deal might rise phoenix like from the ashes of its January obliteration and actually get passed. This still remains very much an outlier in terms of an outcome, but could see a significant upward reaction on the pound if it were to happen.
On the data front we'll get another snapshot of the UK economy, and how events around Brexit as well as the global economic slowdown are weighing on economic activity. Yesterday we saw further evidence that the German economy was continuing to struggle with another contraction in its manufacturing sector in January.
The UK manufacturing sector has also shown similar signs of weakness in recent months, though not to the same extent, with expectations that we might see a modest improvement in January. In December, the UK economy saw GDP contract by 0.4%, as 2018 went out with a whimper, largely down to a sharp slowdown in manufacturing and construction. This is expected to bounce back in January with a modest expansion of 0.2%, helped by a better performance across all sectors, with services expected to contribute 0.5%.
The US economy will also be back in focus today after yesterday's disappointing retail sales numbers for January. We did see a modest rebound of 0.2%, however this was offset by the fact that the so called "glitch" of a 1.2% decline in December was revised to a 1.6% decline. Today's CPI numbers are likely to reinforce the narrative of patience now being pushed by US Fed officials.
The headline numbers for CPI been fairly subdued in recent months, with core CPI steady at 2.2% for the last three. The more fluid number which includes food and energy has dropped from 2.5% at the end of Q3 to 1.6% at the end of last year. This sharp fall has probably played a part in the recent change of tack by the US Federal Reserve in pausing its rate hiking cycle as US policymakers adopt a wait and see approach in terms of what to do next. Today's February CPI is likely to reinforce that caution remaining steady at 1.6%.
EUR/USD – the euro has continued to decline pushing below its lows last year and testing the 1.1180 area which is 61.8% retracement of the entire 1.0340/1.2545 up move. This is likely to be a key support in the short term, with a break below targeting the 1.1000 area. We have resistance at 1.1270, as well as the 1.1400 area.
GBP/USD – managed to hold above 1.2970 trend line support from the lows this year at 1.2430, rallying back towards the 1.3300 area. Last week's bearish reversal keeps the pressure on the downside on a break below 1.2960, while a move through the 1.3350 highs, targets the 1.3500 area.
EUR/GBP – failed at the 0.8675 area breaking back below the 0.8620/30 pivot area, and moving back through the recent lows at 0.8530, with a sustained move through the 0.8500 targeting a move towards the 0.8420 area
USD/JPY – having failed to consolidate a move above 112.00 last week the US dollar has fallen back below the 200-day MA at 111.43, potentially opening up a return to the 110.70 area. While below 111.40 the risk is for a return towards the 110.20 level.