GBP surges as Brexit deal optimism spreads
The cable surged on Wednesday as it added 1.53% to $1.3029 after EU negotiator Michel Barnier said the EU would offer the UK a unique deal. The announcement made investors more than happy as it means that the UK would get at least a deal! However, we expect that there won’t be much room for negotiations as the EU will most likely impose its conditions, meaning that the UK will have to take it or leave it.
In our view, the market has been overly optimistic recently and the sharp appreciation of the pound will be short-lived as the EU will never allow the UK to cherry pick conditions. The UK government will have no choice but to comply with the EU’s demands and conditions. Over the last 24 hours, EUR/GBP fell 1.40% as it returned to £0.9878; however, the bias remains on the upside, as investors will soon realize that the pound is overbought and that nothing has changed so far.
Loonie at mercy of NAFTA deal
As Canada scrambles to reach closure on the North American Free Trade Agreement, CAN is wobbling. It gained (USD/CAD: -0.77% week-to-date), but now the trend is reversing. USD/CAD is bouncing off 1.2907 (29 August low) and expected to hit 1.3010.
NAFTA talks are in progress with a deadline set for Friday by the US: a very tight goal. Canadian Prime Minister Trudeau says closure is feasible – we’ll see. Canada is ready to make concessions on auto content. Other topics include Canadian protective tariffs on agricultural products such as dairy, poultry, eggs and wine, broadening of trilateral dispute settlement topics and US tariffs on aluminium and steel. Either the negotiation will have to be extended, or the deal will be settled hurriedly. The latter could lead to no deal in the end, which could cause massive investment outflow. The US-Mexico deal looks easier to achieve than the US-Canada one.
US stocks on a roll
The out-performance of American equities is more then just the result of Trump’s tax cut. There is a dynamism not seen in European companies. US companies have shrugged off risk and focused on the opportunities (solid domestic and global demand). Threat of a trade war has not slowed investment or strategic initiatives. US companies also enjoy a white-hot economy (GDP printing at 4.2% against 4.1% expectations) led by consumer optimism (highest since 2000) and business confidence that is materializing into solid earnings (75% of S&P 500 beat Q2 estimates)
In Europe, risks such as Italy’s budget, Brexit, Germany’s October elections and EU political fragmentation are paralyzing. Yet EU companies’ profit growth around 6% is not terrible. As the European Central Bank begins to lift rates, financial stocks will go higher, leading to a broader rally in European shares.
