European markets broadly trod water yesterday as investors digested a mixed bag of earnings announcements. US markets had a disappointing session with the S&P500 slipping back below the 3,000 level, despite rising optimism that the US and China can continue to make progress on their ongoing trade talks.
It would appear that another mixed day for earnings is making investors reluctant to drive markets aggressively higher towards new record highs. At the same time, the results we are getting that is falling short aren’t bad enough to prompt concerns that a sharp slowdown is imminent either.
The Brexit saga took another twist yesterday evening and looks set to be reflected in today’s European open. Having rallied on optimism that we might finally be coming to the end of the beginning of this long-running saga, the DAX had risen to its highest levels in over a year, however last night’s setback in the House of Commons means the uncertainty is set to go on for quite a bit longer, and as such we look set for a lower European open this morning.
The pound had another busy day on the Brexit rollercoaster yesterday after MPs finally found a deal that they could vote for, with a majority of 30, by 329 votes to 299. That was the good news and as with all things Brexit, nothing is ever that simple. Having voted by 329 votes to 299 votes, they then proceeded to vote against a motion, fast-tracking the bill through Parliament in the space of three days, with the government losing by 14, 322 votes to 308, thus keeping us in the Brexit waiting room for a little bit longer. After all, what’s another few days or weeks, when you’ve had over three years of almost constant deadlock. Unsurprisingly the prospect of further delay and continued uncertainty has seen the pound slip back.
Rather than pulling the bill as had been briefed in the lead up to the vote the Prime Minister announced that he would pause the legislation while he consulted with EU leaders as to what possible next steps might follow. It is now ever more unlikely that the UK will leave the EU as scheduled on 31st October, which means that the next outcome is now another extension to the Article 50 process.
It now appears it's now a case of what the EU now decides in terms of the length of the extension. The Benn act required the Prime Minister to ask for an extension until January 2020, and while that is the default position it could well be less than that. Donald Tusk, President of the EU Council in response to last night’s events has already recommended that the EU27 accept the extension request.
It is no secret that the Prime Minister would prefer a short extension so that he can exert maximum pressure on MPs to push the bill through, and he can point to the fact that he was able to get his deal passed at the first time of asking, unlike Theresa May who had three attempts and failed. If on the other hand, the EU were to accede to the UK request for a long extension then it is conceivable that the UK government might look to junk the deal entirely and push for an election.
It seems clear that there is a pathway to a deal, and depending on the extension, MPs could still attach a number of amendments to the deal as it gets scrutinized across the house. While some of these amendments are eminently sensible there are still some MPs who want to thwart the Brexit process, whatever the cost. Furthermore, the delay also eats into the time available to discuss the future relationship which means that the transition period will also need extending beyond December 2020, whatever is decided in the coming days or weeks.
The big question now is whether the Prime Minister pulls the bill completely, or whether he perseveres with the bill in the hope it is not amended to death, before pulling it completely and trying to push for an election on the deal itself.
Once again it’s a case of watch this space.
EUR/USD – finding a bit of a top just below the 1.1200 area and 200-day MA, which is likely to act as decent resistance. Support currently comes in at the 1.1100 area, and below that, at trend line support from the lows this month comes in at the 1.1050 area, and below that at the 1.0920 area.
GBP/USD – the 1.3020 area continues to be a tough nut to crack and as such we could well see a slide back towards the 1.2840 area in the short term. A move below 1.2840 opens the prospect of a move towards the 1.2670 area. While above the 1.2840 level the prospect of further gains towards 1.3200 is a possibility.
EUR/GBP – the 0.8570 area appears to be offering near term support for now. A break below the 0.8570 level has the potential to open up a move towards the 0.8410 area and the lows this year. Pullbacks need to stay below the 0.8715/20 area for further losses to unfold.
USD/JPY – the 200-day MA and the 109.20/30 area appears to be capping gains for now. Support comes in at the 107.50 area, as well as the lows this month at 106.50
FTSE 100 is expected to open 7 points lower at 7,205
DAX is expected to open 76 points lower at 12,678
CAC 40 is expected to open 40 points lower at 5,617
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