European equities were mostly flat early in the session but turned mostly lower since then as numerous Brexit headlines weighted investor sentiment. The exception was Britain’s FTSE 100 that keeps in the positive territory due to a plunge for the pound. It’s really all about Brexit today. After the cabinet approved draft deal on exit yesterday, on Thursday a flurry of negative news followed. In particular, there are numerous reports on resignations in the UK government. Among them are Brexit Secretary Dominic Raab who said he cannot in good conscience support "the UK's draft Brexit agreement with the EU; junior Brexit minister Braverman, the Work and Pensions Secretary Esther McVey and the UK Northern Ireland minister who said to have quit government as well.
Meanwhile, a EU official noted that he is not 100% sure if Brexit text will not be altered and DUP’s Wells stated that it’s absolutely clear that the deal is dead. Theresa May meanwhile noted that yesterday’s agreement was not the final deal but it didn’t help the pound anyway. According to the latest news, Rees-Mogg submitted letter of no confidence in PM May. So the key question now is if there are enough votes against the prime-minister.
As such, Italy’s FTSE MIB loses 0.55 per cent to 18,973, Britain’s FTSE 100 adds just 0.17 per cent to 7,045, France’s CAC 40 sheds 0.39 per cent to 5,049, while German DAX 30 declines by 0.05 per cent to 11,406. US stock index futures point to a slightly higher open.
Against the backdrop of political drama in the UK, the Bank of England rate hike in 2019 has been priced out. In another bearish sign for the sterling, UK October retail sales surprisingly contracted by 0.5% versus the expected recovery by 0.2% after a decline by 0.4% a month earlier. Considering such a number of bearish drivers it’s not surprising to see the pound plunging today. As such, following a two-day rise, GBPUSD has slipped from above 1.30 to 1.2750. Despite the pair has trimmed losses a bit since then, the downside risks obviously remain as May will hardly get the deal approved by parliament unless the convinces the EU to make some concessions to the Irish backstop. Besides, further ministerial resignations are likely to come.
The sterling sell-off failed to attract dollar demand elsewhere though. The buck is grinding lower against major rivals including the Japanese yen. USDJPY faced the intraday support at 113.30 once again, and the downside pressure looks limited at this stage, as long as there is no obvious risk aversion in the global financial markets. The 114.00 figure remains the key hurdle on the upside, and it looks like the pair will spend some time in a consolidation mode before a more directional move. The US and China are reported to have resumed the trade talks and any positive headlines from this front could help to improve risk sentiment and thus weaken yen demand.
Meanwhile, Brent crude shows no signs of life around $66.60. Yesterday, the prices started to recover from lows below $65 and it looks like the market has stabilized after an aggressive sell-off earlier this week. The OPEC+ exporters came out with verbal interventions and promises to take necessary measures to avoid another supply glut, which calmed traders down. However, as the current rebound looks shallow and lacks impetus, and investors continue to worry about the increasing US shale production, a threat of another plunge remain, albeit looks lower at this stage. Technically, Brent needs to regain the $67 figure and stay above $65 in order to pave the way for another leg higher. The futures look quite attractive for buyers at current levels but the market needs additional support and lack of fresh negative news to stage a more decisive recovery.
Nathan Lambert, Head of Global FX Analytical Department