The FTSE started the day at a slightly lower note following the spectacular defeat in Parliament of the Prime Minister’s Brexit proposal. London has woken up to a new day of uncertainty as Jeremy Corbyn tabled a motion of no confidence in the government which will be decided on today. It is far from given that the vote will manage to shift the government.
The PM managed to withstand the no-confidence vote from her own party only recently and UK opinion polls indicate that she still leads against the Labour leader despite months of chaotic Brexit dealings.
The currency markets are increasingly reading this as a positive sign, believing that a hard Brexit is becoming more unlikely than an extension of the Brexit March deadline or even a change on the overall Brexit direction. The pound bounced against the dollar and euro immediately after the vote Tuesday evening and it is still holding its ground, up 0.2% against the common currency and up 0.17% against the greenback.
US banks lower fourth quarter results
Bank of America (NYSE:BAC) is due to report its fourth quarter earnings later today and looking at numbers produced by its peers Citi, Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) earlier this week there is a common theme emerging. All three banks have reported a decline in revenue.
One area that was hit in particular was mortgage lending, mainly because consumers have fled from big bank mortgages post 2008 and have flocked to specific lending institutions that only focus on house loans. The trading banks, Citi and JP Morgan, also suffered major losses on their trading books, in fixed income typically more than equities.
What will work in favour of the banks going forward is the Fed’s plan to slow down interest rate increases this year to help keep consumer spending and house buying up. But the prolonged US government shutdown is beginning to work against big financial institutions because US market regulator the Securities and Exchange Commission has now been closed for the three weeks disrupting normal market operations such as IPOs.
British consumer spending
In amidst the UK’s political chaos the country’s economic numbers keep nudging lower as businesses and consumers struggle with Brexit-induced uncertainty. British consumer spending fell in December at the fastest rate in eight months, and although consumers splurged in bars and restaurants this was not enough to offset lower spending on the high street. Online sales gained in favour of shop spending but in total Christmas spending was at its weakest since the financial crisis.
Traders take the optimistic view
The fact that the pound pared losses quickly and rebounded strongly indicates that traders are seeing this defeat as an opening towards an extension of Article 50, rather than the start of a no deal Brexit. However, questions remain as to whether the pound will be able sustain these levels. That depends greatly on what comes next.
It is difficult to imagine that the pound will be able to move much above $1.30, given the level of uncertainty that remains. Whilst traders are taking the optimistic view and starting to believe that there is more of a chance of Brexit just not happening at all – that is definitely not the case right now. There is still significant ground to be covered before we even get close to Brexit collapsing.
Theresa May to win a vote of no confidence
Reports suggest that Theresa May will survive the opposition leader Jeremy Corbyn’s vote of no confidence on Wednesday evening, after her party rebels have guaranteed support to her. This then leaves the question what next for Brexit?
Theresa May has until Monday to say how she intends to proceed. Given the sheer scale of her defeat, this isn’t about a few adjustments to the deal but a thorough overhaul in its approach. With the clock ticking an extension of Article 50 looks almost certain. We can expect volatility to remain in the pound for the foreseeable future.
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