- Brexit
- US politics
- USD
- Gold
- Oil
It's going down to the wire as May’s deal survives further votes
It’s safe to say that it’s been a highly politically focused week so far, one that hasn’t had a great impact on the broader markets but has certainly grabbed the attention of participants.
Of course, there are pockets in the markets that are more sensitive to various political developments, the sterling Brexit connection being a clear example of this. But its impact on the wider markets is minimal at best.
The FTSE has significantly underperformed its peers – down almost 1.7% so far this week - as the pound has surged back above 1.30, further highlighting its indirect sensitivity to the outcome of the process.
Optimism around Brexit has clearly grown this week, not because we’re closer to a deal – although the clock is ticking so technically we should be – but because the threat of no deal is diminishing and a second referendum has risen from the grave to become the reluctant adopted policy of the opposition Labour Party.
We’re now a month from Brexit eve and it’s clear that the only thing edging us closer to a conclusion is the clock and that with a week to go, we may be still waiting for Parliament to agree. If we weren’t so desensitised to this kind of politics, traders may not be quite so relaxed about the whole situation. Perhaps complacency will come back to bite as it did on the day of the referendum back in 2016.
Other political developments - whether it be Trump’s meeting with Kim in Vietnam, Michael Cohen’s testimony in Congress on the US President or a significant escalation between nuclear powers, India and Pakistan – are being keenly followed by market participants but are having minimal impact right now. Robert Lighthizer’s testimony on the trade discussions with China could have more market implications but even that may be clutching a little as much of what was said was either known or assumed.
Dollar continues downtrend supporting gold today
Even Jerome Powell’s two day appearance in Washington before the Senate Banking and House Financial Services Committees had a minimal impact as the Fed Chair basically reiterated what had already previously been disclosed, which tends to be the case in these sessions which are often overhyped beforehand. The dollar has softened in the last 48 hours but this was more an extension of the trend that preceded it the two weeks before, rather than any mention of quantitative tightening.
Gold is seeing the benefit of that today, although I am still less bullish about the near-term outlook for it. The dollar has been on a downtrend for the last two weeks, central banks have remained dovish and geopolitics has been supportive and yet, gold has been on the decline the last two weeks.
This isn’t necessarily a dislocation in the markets but more a sign that the bull run was overextended and is in a corrective mode. As it is, that hasn’t taken it through $1,320 but it may, at which point $1,300 will be the next notable support area.
Oil pares Wednesday’s gains as inventories plummet
Oil surged on Wednesday after EIA reported a huge drawdown in inventories, which completely went against expectations of a small increase and even far exceeded the 4.2 million drawdown that was reported by API.
The near-term picture is uncertain here, with Brent and WTI having not even reversed Monday’s declines, despite the data and a softer dollar. If we continue to see more evidence of the cuts taking hold then this may reverse higher but for now it looks vulnerable.
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