We’re seeing a mildly negative start to European trade on Tuesday, as attention in Europe switches from Brexit to the ECB, amid high expectation of an aggressive pending stimulus package.
We may have to wait until November to judge just how bad a couple of weeks it’s been for Boris Johnson or whether all the theatrics have simply masked a series of events that’s progressing roughly as planned. It would be quite extraordinary if his master plan has been undone by Parliament predictably legislating to block no-deal and Jeremy Corbyn, maybe less predictably, not jumping at the chance to have a quick election.
Parliament is now suspended for five weeks, time that should be spent negotiating with the EU to try and salvage Brexit, but I expect Johnson may have other ideas. I don’t expect the PM to be deterred by the small detail of an election not being backed by Parliament and will be hitting the campaign trail hard while members of his team plot his next steps.
I struggle to see any real progress between the UK and the EU before the European Council meeting in the middle of October, unless Johnson can miraculously provide detailed plans of the alternative arrangements that have long been touted as an alternative to the backstop. I don’t think anyone is holding their breath there so instead, we’ll probably just be treated to a five week no-deal, people vs parliament, PR offensive. It will be interesting to see if the pound falls victim to it or holds firm on the belief that no-deal won’t happen.
Gold stumbles as risk appetite picks up
Gold bulls may finally be conceding defeat after repeated tests of the $1,520-1,560 range failed to produce a breakout. This has historically been a major area of support and resistance for the yellow metal so when momentum started to slip on approach to it again, it was clear it was in for a tough test.
Gold took one more stab at $1,560 last week and has since been on the decline, breaking initial $1,520 support and now looking to test $1,480. A break of this could signal a broader correction after, what was, a strong rally built on vast central bank easing and risk-aversion in the markets. While the former hasn’t changed – as the ECB is expected to prove on Thursday – risk appetite has improved with US stocks pushing record levels once again.
Oil rally will be repeatedly challenged
Oil prices have also been lifted by the improved risk environment. Unfortunately, they’re not exactly scaling past highs like stocks are, as the economic outlook hasn’t really changed. Oil prices have been hampered by global growth fears and central bank easing has soothed concerns, while new tariffs between the US and China have only fueled them. Brent is back above $62 which is encouraging but I expect rallies will be repeatedly challenged unless the outlook improves.
