Sterling briefly dipped to its lowest level of the year yesterday, before finding some support and recovering as PM May suffered a double defeat in the House of Commons. MPs found the government in contempt of parliament for the first time in history after their failure to publish legal advice received by the Cabinet, before also voting down a bill which would have limited parliament’s role in deciding what happens if a deal can’t be approved before the March deadline. While the first blow for May was no doubt humiliating, the second is far more significant as it now means that MPs would have to vote in favour of a no-deal Brexit for it to occur; meaning this outcome is far less likely.
This clarifies some confusion surrounding what the default outcome is should parliament not support any deal before the Article 50 window expires and in essence means the chances of leaving without a deal are greatly reduced while at the same time also raising the prospect of not leaving at all. This is a clear positive for the pound as a no-deal Brexit is seen by many as the most negative outcome for sterling. Earlier in the day another positive development for pro-EU remainers occurred when an advocate general to the ECJ argued that Britain could revoke its planned withdrawal from the EU without the approval of other states.
UK service sector slips
The latest business surveys from the manufacturing and construction sector have provided some good news on the UK economy, but any over optimism has been firmly kept in check today with a disappointing release from the service sector. The UK service sector PMI for November slipped to 50.4 from 52.2 last month and when you consider that the median forecast was for an increase to 52.5 it’s not hard to see this is as a negative surprise. Given the relative size of the sectors, the services is seen as by far the most important and the most recent figures put the level of UK growth in the final quarter of the year on track for an anaemic 0.1%. Having said that, the market has looked through all these latest data points by and large, with forex traders seemingly of the opinion that they have bigger fish to fry as they continue to be far more interested in the latest developments on the Brexit front.
Santa Rally stalls
After surging out of the starting grid at the beginning of the month, the rally seen in global stock markets has well and truly stalled and possibly even gone into reverse. December is one of the best performing months for stocks with the FTSE gaining in 8 of the last 10, but after opening strongly on Monday morning the benchmark is now below last week’s low and has dropped beneath the 7000 handle once more. The early optimism of the Trump-Xi trade truce has well and truly subsided as investors start to question whether it is really a turning point in tensions between the world’s two largest economies or simply a pause before further escalation. In the US, the S&P500 not only erased the gains seen from the weekend news but also the rally on the back of dovish comments from Fed chair Powell as the index tumbled by more than 3%.