Originally published by Rivkin Securities
All eyes on the UK on Tuesday as Prime Minister Theresa May pledged to quit the EU single market and seek a customs agreement with the EU whereby the UK could also negotiate trade deals with other countries, which the current customs union prevents. In order to seek an orderly Brexit May also stated her aim was for a transitional arrangement for financial services and other companies which would allow them to adjust to new rules phased in over time, importantly to avoid “falling off a cliff”.
The UK PM outlined twelve key points for her Brexit strategy, aside from the transitional deal, wanting tariff free trade with the EU and regaining control over immigration, the most important aspect is that May will give the government a final vote on the Brexit deal. Taken together this should help alleviate some of the harder Brexit concerns that overall sends a positive signal to reassure UK business and investors. However a healthy scepticism remains, given free trade agreements typically take more than two years the negotiate, that’s if the UK is able to reach such an agreement with the EU.
Now the focus will turn to the UK Supreme Court decision due in the next few weeks as to whether May must first consult parliament before triggering Article 50 to begin negotiations to withdraw from the EU. Although since the government will now vote on a final Brexit deal this is of less importance. Then negotiations will begin and we can still expect plenty of “sabre rattling” from leaders on both sides, with EU leaders warning that the UK cannot cherry pick the best parts of the EU without paying while the UK has warned that “no deal is better than a bad deal” reflecting a willingness to return to WTO rules.
It seemed a clear cut case of “buy the rumour, sell the fact”, or in the case the inverse as the pound which had been hammered recently surged +2.97% against the US dollar and +1.9% against the euro shown on the first chart below. While this was primarily driven by Theresa May’s speech, UK inflation figures also played their part.
Year-on-year for December the headline figure increased +1.6% exceeding expectations of +1.4% and a previous reading of +1.2%. Similarly a core measure of inflation increased +1.6% over the same period surpassing forecasts to remain stable at +1.4%. Gains in inflation have been driven by the weaker Pound and are set to rise to +2.7% in 2017 according to the Bank of England forecasts. The concern has been that inflation is rising faster than anticipated and the BOE will only tolerate so much above their estimates. Where exactly that threshold lies is anyone’s guess and will depend on how quickly prices approach that level. If the pound now begins to stabilise above the 1.20 level then this should help ease those concerns.
Financial markets across Europe and the US sold off, although in Europe the majority of initial declines were recovered. The Euro Stoxx 600 finished -0.15% weaker after declining as much as -0.70%, as did the DAX closing -0.13% lower having declined -1.12%. The FTSE100 was hit by the stronger pound, falling -1.46% while the FTSE 250 which is less export focused only fell -0.36%. In the US both the S&P 500 and Nasdaq 100 fell -0.30% and -0.29% respectively.
Investors bid safe haven assets, with the yen gaining +1.29%, the U.S. dollar index falling -0.80% helping boost spot gold and silver +1.06% and +2.34% respectively. US treasury yields dropped with both the two and ten-year yields falling -3.6 basis points and -5.3 basis points respectively to yield +1.1565% and +2.3272%.
Locally the S&P/ASX 200 closed lower on Tuesday, down -0.85% at 5,699.42 and this morning we can expect an extension of those declines with ASX SPI200 futures down 9 points in overnight trading.
Data releases:
· Australian Westpac Consumer Confidence (MoM Jan) 10:30am AEDT
· German CPI (MoM & YoY Dec) 6:00pm AEDT
· U.K. Unemployment (3M Nov) 8:30pm AEDT
· Euro-zone CPI (MoM & YoY Dec) 9:00pm AEDT
· U.S. CPI (MoM & YoY Dec) 12:30am AEDT
· U.S. Real Average Weekly Earnings (YoY Dec) 12:30am AEDT
Chart 1 – GBP/USD (Blue) & EUR/GBP (Purple)
