May’s Brexit deal faces first test on Wednesday
It looks as though we’re heading for another day in the red in equity markets, with events in Europe and the sell-off in oil markets stealing much of the headlines as investors once again take a step back from risk assets.
After months of hard negotiations, Theresa May has finally returned home with a deal on the exit terms which she will put before her cabinet today. This should be the easiest hurdle to overcome over the next month as she attempts to convince parliament that these are the best terms on offer. If May was to somehow fall at the first hurdle, it would be a humiliation of epic proportions which she may struggle to come back from. I imagine therefore that there is little chance of this happening, putting the focus on the parliamentary vote in the weeks ahead.
The usual crowd have been quick to criticise May’s deal - even those that have yet to see it - claiming it’s either a failure to deliver on the referendum, far worse than the deal we currently have or in the case of the DUP, is a betrayal to Northern Ireland. Naturally, these views may not represent the majority in parliament but they do represent a variety of groups that suggest a vote will be far from straightforward. May has a real task on her hands now that may make negotiations with the EU look like a walk in the park by comparison.
Rome on collision course with Brussels
It’s not just the UK that Brussels needs to worry about, Italy on Tuesday re-submitted its draft budget without any changes to its fiscal deficit targets or its growth projections, putting it on a clear collision course with the European Commission. Rome did offer up asset sales of up to 1% of GDP as a sweetener for the deal but this is unlikely to be enough to appease the Commission.
Rome and Brussels have now effectively entered into a game of chicken, with the former banking on the latter not wanting to stir up more euroscepticism in the country and the latter having bond markets on its side and the ability to impose financial sanctions. It’s going to be an interesting battle that could set a precedent for future battles between Brussels and other populist governments in the euro area and for that reason, I don’t expect Brussels to back down. There may be some mild concessions but given the fragile position of Italy’s bond market, I don’t think they hold the strongest hand.
Oil pares losses but negative headlines keep appearing
Oil has stabilised a little today, even paring some of its losses at the moment, although today’s gains pale into insignificance compared to the losses incurred on Tuesday. It seems we’re seeing one negative headline after another for oil at the moment, whether it’s Iranian sanctions waivers, inventory builds, record US output or lower demand growth forecasts.
The OPEC report on Tuesday forecast lower demand growth for the fourth consecutive month, which piled further pressure on oil prices and today IEA have revised up non-OPEC output for 2019, leaving demand unchanged for now.
Even reports that OPEC+ are discussing a 1.4 million barrel per day cut is doing little to support prices which could remain under heavy pressure ahead of next month’s meeting in Vienna. We may see some near-term support around $55 in WTI and $65 in Brent, with $50 and $60, respectively, being the next key levels below if the sell-off continues.
Disclaimer: This article is for general information purposes only. It is not investment advice, an inducement to trade, or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Ensure you fully understand all of the risks involved and seek independent advice if necessary. Losses can exceed investment.