Brexit Deal in place but limited market reactions
On Sunday, European Union leaders accepted a Brexit deal package from UK Prime Minister May. Currently EU leaders, with the exception of Spain, are backing the deal but time will tell if the political divisiveness doesn’t demolish the current optimism. While Europe stocks are expected to open higher, sterling is relatively unmoved. The lack of market reaction highlights the weariness investors have with the Brexit negotiations. The focus now turns to the ‘meaningful vote’ on the deal in the UK Parliament. The ramped-up rhetoric has heightened the stakes on the Brexit vote with many politicians risking it all for one direction of another. This creates a dynamic where government has a challenging task ahead of them to convince objectors to accept a less-than-perfect deal (which does not exist). Under scrutiny it’s likely that cracks will appear, weakening the probability of sufficient votes and strengthening fears of a hard Brexit. The Brexit headlines will continue to dominate and hinder the rate from rising. Given the ‘noise’, negatives on GBP are already priced in. The complexity of the withdrawal deal is sustaining high short-term implied volatility. The GBP/USD trading range will remain constricted between 1.2770 and 1.2900.
Asian and European shares higher amid last Friday’s slump
Closing in negative territory during the previous week’s trading session – amid growing worries over a potential breakthrough in US-China trade discord and fears of a growth slowdown in Asia – Asian stock markets have been rising higher, despite uncertainties relating to a potential easing of trade tensions as Donald Trump and Xi Jinping meet at the G20 summit. There are hopes of a slowdown in pace of the Fed’s tightening cycles, whose November meeting minutes were published on Thursday, providing a better overview of its stance. The Nikkei 225 has been rising by + 0.76% while the Hong Kong Hang Seng and China mainland respectively advanced by +1.73% and closed flat (-0.07%), with energy shares down due to sharp drop in crude over the last one and a half months. Indeed, it appears that today’s trading session should remain in the green globally. US futures and European markets are rising while positive developments regarding EU members’ approval of a transitory Brexit solution and Italy’s complacency relating to its budget expenses (recent publications mention a reduction of 10 – 20 BPS, despite European Commission deficit expectations set at 2.90% for 2019) push European shares above 1% across the board. The Italian FTSE MIB surges as much as 3% in early trading, while the Euro Stoxx 50 rises by +1.42%. Accordingly, we expect Asian shares to head higher following the G20 summit, as a slight relief in US-China trade talks should raise up investor sentiment. USD/CNY, currently trading at 6.9383, is expected to remain directionless – maintained at 6.95.
