May Faces Difficulties Keeping Cabinet United Over Brexit

Theresa May is braced for her Cabinet to split when the European Union rejects her demands for a sweeping free trade deal, after her senior team agreed to put off the hardest Brexit decisions until later.Despite the Cabinet truce after months of internal division, three senior government officials said May will face her most challenging task keeping her ministers united when — as they expect — EU leaders formally reject the British approach.The U.K. prime minister won the backing of her ministers to ask the EU for the most ambitious and wide-ranging trade agreement the bloc has ever signed, after a marathon eight-hour meeting at her country house on Thursday.

Source: May Knows Danger of Cabinet Split on Brexit Still Lies Ahead – Bloomberg

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

50 50 Chance of Halting Brexit

Opponents of Britain’s exit from the European Union are preparing a major campaign they say now has close to a 50:50 chance of stopping Brexit by blocking Prime Minister Theresa May’s divorce deal, a leading pro-EU campaigner said.With Britain scheduled to leave the EU in March 2019, opponents of Brexit are exploring various ways to stop what they say is Britain’s biggest mistake since World War Two.‘Best for Britain’, a campaign group which received a 400,000 pound donation from billionaire financier George Soros last year, hopes to convince lawmakers in the 650-seat parliament to block the withdrawal deal May aims to bring back from Brussels in October.

Source: Chance of halting Brexit now close to 50:50, says leading campaigner – Reuters

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

Macron Inspires New UK Party Intent on Blocking Brexit

A new British party inspired by French President Emmanuel Macron’s movement launched a campaign on Monday to thwart Brexit by convincing MPs to block any EU withdrawal deal Prime Minister Theresa May can strike.Sandra Khadhouri, together with fellow Renew party members James Clarke and James Torrance, speaks at the launch of the new political party in London, Britain, February 19, 2018. REUTERS/Peter NichollsWith just over 13 months left until Britain is due to leave the EU, opponents of Brexit are exploring ways to stop what they call Britain’s biggest mistake since World War Two.The Renew party, founded last year after Macron’s En Marche! movement propelled him to power, said it would target pro-Brexit MPs in constituencies with high levels of support for EU membership.

Source: New British party inspired by Macron seeks to overturn Brexit – Reuters

Don’t go barking up the wrong tree in the Year of the Dog

Dollar Regains Ground Ahead of Fed Minutes

Dollar Dives on Confidence, No Support from Fundamentals

Thursday February 15: Five things the markets are talking about

U.S bond yields have backed after an unexpected rise in U.S consumer inflation to its fastest pace in a year – the core’s +1.8% y/y print yesterday was higher than expected, but still below the Fed’s +2% target – making it more likely the Fed will raise interest rates three or more times this year. But, higher U.S rates have not been able to make the U.S dollar more attractive.

The dollar remains under pressure, building on yesterday’s slide in the Euro session, as the market seems to be losing confidence in the long-run state of the U.S economy.

The Dollar Index is down -0.5% and poised to log another three-year low if the decline persists as we head to U.S session open.

Without any new positive U.S demand or supply shocks that could change the landscape for the country’s economy, it’s easy to see the weak dollar story persisting.

For the dollar to rise with Treasury yields, which it has not been doing this year, there needs to be a return in relative confidence over the medium-term U.S.

Also yesterday, January retail sales fell unexpectedly in their biggest drop in 11- months, declining -0.3%, raising new concerns about the U.S economy as a weaker sale print will lead to lower expectations for Q1 GDP growth.

1. Stocks edge higher

The global stock rally is marching ahead as investors take in stride a jump in sovereign yields.

In Japan, the Nikkei posted a solid rise despite a stronger yen (¥106.31). The index ended up +1.5% overnight, after tumbling to a four-month low on Wednesday. The broader Topix advanced +1.0%.

Down-under, Australia’s S&P/ASX 200 rebounded +1.2% as the stock index’s energy component rallied +2.4% to reverse some of this month’s decline.

In a shortened session ahead of the Lunar New Year holiday, Hong Kong’s Hang Seng Index jumped +2%. Its rise of +5.4% this week has erased +50% of last week’s decline, its biggest fall in a decade.

Note: China, South Korea, Taiwan, Vietnam markets were all closed.

In Europe, regional indices continue their ascent higher, tracking another positive session in Asia and on Wall Street yesterday. The French CAC is +1% higher following earnings from a host of Index components. The Swiss SMI is underperforming after Nestle reported mixed results.

U.S stocks are set to open in the ‘black’ (+0.8%).

Indices: Stoxx600 +0.9% at 378.0, FTSE +0.7% at 7264, DAX +0.9% at 12455, CAC-40 +1.6% at 5248, IBEX-35 +1.3% at 9808, FTSE MIB +1.1% at 22687, SMI +0.2% at 8924, S&P 500 Futures +0.8%

2. Oil rises on Saudi commitment to withhold output, gold higher

Oil prices have rallied +1% overnight to extend their gains from yesterday’s session, lifted by a weak dollar and Saudi comments that it would rather see an undersupplied market than end a deal with OPEC.

Brent crude futures are at +$64.99 a barrel, up +63c, or +1%, extending Wednesday’s +2.6% climb. U.S West Texas Intermediate (WTI) crude futures are up +83c, or +1.4%, from Wednesday’s close at +$61.43 a barrel, adding to its +2.4% gain.

Oil markets have got a push from comments by Saudi Arabia, voicing support for output cuts backed by OPEC and other producers including Russia since 2017 in an effort to tighten the market and prop up prices.

OPEC Secretary General Barkindo said that preliminary data for January points to high compliance of cuts by producers.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar weakens and investors’ bank on the precious metal as a hedge against inflation. Spot gold is up +0.3% at +$1,354.34 an ounce and is heading for a fourth consecutive session of gains.

3. Sovereign yields rise

The yield on U.S 10-year Treasuries is nudging closer to +3%, continuing its steady advance from last year’s low of +2.01% in September.

Following this weeks U.S inflation data, and the potential implications that it has for the pace of Fed rate increases this year, the market will be closely scrutinize speeches later today by ECB policy makers to see whether the recent market turmoil will convince them to ease off plans to taper their bond purchases.

Note: Fed-fund futures show a +21% chance of at least four interest-rate increases by year-end, compared with +17% earlier this week.

In Germany, the 10-year Bund yield has gained +1 bps to +0.77%, the highest in more than two years on the biggest gain in a week.

4. Dollar dives again

The USD remains on the defensive despite higher U.S yields –the currency is usually highly correlated to short-term rates. Market seems to be reacting to concerns over weak U.S policies and/or diverging central bank policies as both the BoJ and ECB could begin tightening monetary policy.

The EUR/USD (€1.2467) probed the upper end this week’s and year range as the pair re-tested the €1.25 handle. Sterling (£1.4042) is a tad higher initially aided by reports that the E.U Commission was looking to ease the Brexit transition conditions. However, the E.U later refuted the reports. The pound is also finding support not only from the dollar’s weakness, but also a perceived higher probability that the current U.K government will serve its full five-year term.

USD/JPY (¥106.69) continues to trade atop of its 15-month lows as the pair probed below ¥106.20 overnight. Japan’s Finance Minister Aso comments that the yen’s strength is not abrupt enough to require intervention supported the yen’s rally.

In cryptocurrencies, bitcoin (BTC) is moving back toward $10,000, up +6% on the day at +$9,840 – the price had slumped some -70% in the past six weeks.

5. Crisis in the Northern Ireland

U.K PM Theresa May is facing a political crisis in Northern Ireland as the DUP, who are part of the government’s coalition, have stated there was “no prospect” of a power sharing deal and suggested a return to direct rule.

This crisis threatens to throw the Good Friday agreement into jeopardy and would be a significant blow to P.M May’s authority as she attempts to agree to a crucial Brexit deal over the Irish border.

Forex heatmap

US Futures Higher After Second Plunge This Week

Indices Remain Vulnerable After Entering Correction

US futures are trading slightly in the green ahead of the open on Friday, a day after stock markets once again tumbled leaving indices in correction territory.

As we saw on Thursday, this isn’t necessarily indicative of calm returning to the markets. The Dow recorded declines of more than 1,000 points for the second time this week, having never done so before, despite futures prior to the open being relatively unchanged on the previous days close.

Equities Lose $5 Trillion as Bulls Slay Bulls

Clearly there remains a lot of volatility and nervousness in the markets and I don’t expect this to ease up heading into the weekend. Stock markets will likely remain vulnerable to further shocks heading into today’s close and possible even next week. That said, with a 10% correction having now completed, I wonder whether investors will now start looking to buy the dips as the fundamental backdrop remains strong.

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US Congress Passes Funding Bill Ending Brief Government Shutdown

On a more positive note, the House and the Senate approved a new funding bill in the early hours of Friday morning that will see the government through to 23 March and increase spending limits for two years, ending a showdown that came into effect overnight.

Markets haven’t been too concerned about the prospect of a shutdown since the start of the year despite two having now taken place so I don’t expect to see any boost now that a deal has been reached. This is merely just another self-inflicted risk that’s been temporarily averted.

CAC Loses Ground as Global Sell-Off Continues

Sterling Dips After Worrying Manufacturing Data

It’s a slightly quieter day in terms of notable economic events. The Canadian jobs data will be of interest given that the central bank has been relatively aggressively raising interest rates over the last six months. The UK GDP estimate from NIESR will also be of interest, given that the pound has continued to rise even as the economy experiences a notable slowdown.

The manufacturing and industrial production figures from the UK this morning showed another dip in December, with the latter in particular experiencing no year on year growth. Given that these are among the areas that have benefited since the referendum, it may be a minor concern. The pound dipped after the releases having failed to hold above 1.40 against the dollar in recent days.

GBPUSD Daily Chart

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Are BoE Interest Rate Expectations Too Bullish?

BoE to Release New Economic Forecasts Alongside Rate Decision

The Bank of England holds its first monetary policy meeting of the year this week, after which it will release the quarterly inflation report alongside its monetary policy decision and hold a press conference with Governor Mark Carney.

The event – which is often referred to as “Super Thursday” – is one of the most hotly anticipated of the UK calendar as it offers significant insight into the thoughts of the Monetary Policy Committee, something that’s become increasingly sought after since it started raising interest rates in November.

BoE policy makers took the decision to raise interest rates after inflation surpassed 3% in November, a level deemed by many to be too high despite being driven by one-off currency moves in the aftermath of Brexit. This is led many economists to forecast another hike this year and two more over the three forecasting period, but have they and others been misled by the central bank?

GBP/USD – Pound Under Pressure, BoE Rate Decision Next

In many ways, the dilemma facing the BoE is no different than that facing other central banks – the economy is growing, unemployment is very low, labour market slack appears low and yet inflation is stubbornly low – but one very important difference exists, Brexit.

The sheer amount of uncertainty that exists because of Brexit has resulted in low growth compared to its peers and its pre-referendum levels, businesses are reluctant to invest and the consumer squeeze is taking its toll. The economy may well have shown more resilience than many feared prior to the referendum but is this really the kind of environment that the central bank should be raising rates in? If not, why did they raise by 25 basis points in November?

The central bank will naturally point to the above target inflation as warranting a hike which would be fair, assuming they believed it would remain at those levels of exceed it, which is debatable. This would also indicate a willingness to raise more if inflation remains well above target. While it’s likely to have peaked, it’s not expected to fall very far for a while which is why people may be anticipating further hikes.

Another possibility could be that they wanted to reverse the emergency post-Brexit rate cut which many Brexiteers criticized at the time and some others have questioned the need for since. Especially when you consider that the central bank was reluctant to move below 0.5% throughout the aftermath of the global financial crisis and eurozone debt crisis. If lower rates were seen as risky or unnecessary then, can they possibly be warranted now? If not and this was behind November’s decision, are the markets wrong in anticipating another hike this year and more after?

Gold Slides to 4-Week Low as Stock Markets Settles Down

This could become a lot clearer in the coming meetings and Thursday should offer some early insight, particularly as the inflation report includes growth and inflation forecasts. Any indication that policy makers are in no rush to raise again could see markets pare back expectations resulting in lower yields on UK debt which could in turn weigh on the pound. We may not get this on Thursday though, assuming we do at all, as they may opt to gradually soften their stance over a number of meetings, particularly if Brexit negotiations aren’t progressing as planned. Ultimately, these will have a major bearing on how interest rates move over the three year forecast period.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

The FTSE 100 may also be sensitive to the BoE event on Thursday, given its inverse relationship with the pound. A stronger pound has typically weighed on the index due to the external exposure of the companies that make up the index, while a weaker pound has been positive for it, as seen in the aftermath of the referendum. It’s been a rough couple of weeks for the FTSE, the last couple of days in particular as volatility has returned in force and equities have been sent into a tailspin lower. A strengthening pound – should the BoE release bullish forecasts and adopt a hawkish tone – may not help matters.

FTSE and GBP Trade Weighted Index Correlation

Source – Thomson Reuters Eikon

Dollar Struggles Despite Fed Optimism

Eurozone Manufacturers Still Extremely Bullish Despite Stronger Euro

It’s been a positive start to trading on the first day of the month, with markets in Europe trading well in the green and US futures ticking a little higher as well.

It’s been a busy morning of economic releases and broadly speaking, the data is very positive for the eurozone economy. The region carried some strong momentum into the new year and the latest manufacturing PMIs suggest confidence in the recovery is showing no signs of faltering. The survey for the region as a whole remained at 59.6, slightly shy of last month’s high of 60.1 while still signalling a strong growth outlook for the sector.

The weak euro has played a big role in the strong performance of the sector which has led many to speculate about whether its resurgence over the last year will hinder output going forward. The survey’s we’re seeing suggest manufacturers are not particularly concerned at this stage and are continuing to see strong demand, despite the 20% increase in the value of the euro over the dollar over the last year. The rise against the pound has been far more modest though.

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UK PMI Slips But Sterling Continues Push Higher

The UK data has been less encouraging as of late and the manufacturing PMI for January was no different, slipping to 55.3 from 56.2 in December. The sector has actually benefited in the post-Brexit world, with the sterling depreciation driving more demand for UK manufactured goods. Unfortunately, it still remains a very small part of the UK economy and the boost seems to be wearing off.

That said, a weaker PMI number this morning did little to shake the pound which is heading back to last week’s highs against the dollar. Cable now finds itself back it pre-Brexit territory, although much of this can be attributed to the greenbacks decline over the last year. The pair found some resistance around 1.4350 but there’s clearly still some bullish appetite there. A break through here could see the pair testing 1.45, which isn’t a million miles from the 2016 highs.

US Data Eyed as Optimistic Fed Fails to Lift the Greenback

The dollar is continuing to have a rough time, even a more optimistic sounding Fed did little to lift the greenback which continues to languish around three year lows. Yields on near-term US debt have risen in the aftermath of the Fed statement, with a rate hike in March now almost entirely priced in and a further two this year around 65% priced in. This would typically be positive for the dollar any gains were short-lived.

There’s plenty more data still to come today, with two manufacturing PMIs from the US as well as unit labour costs, non-farm productivity and jobless claims. Earnings season remains a key focus for investors and some big names are due to report after the close on Thursday, including Amazon, Apple and Alphabet.

Bitcoin Below $10,000 and Looking Vulnerable

Bitcoin is coming under pressure once again today and is trading back below $10,000, a level that has proven difficult to hold below. It’s currently trading down more than 5% on the day though and should we close below here, it could be yet another bearish signal for the cryptocurrency which is already more than 50% below its peak.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.