European stocks are trading mixed and mostly directionless on Wednesday as May’s government faces a no confidence vote after the heavy parliamentary defeat for Prime Minister’s Brexit deal. While May is expected to survive the vote, investors are worried about the political situation in the country. On the other hand, stocks are supported by recent signs that Chinese authorities plan to take more steps to bolster its slowing economy, while the Fed is going to take a pause in hiking rates, which is also positive for stocks and riskier assets in general. As such, German DAX 30 loses 0.08% to 10,882, Italy’s FTSE MIB adds 0.63 per cent to 19,286, Britain’s FTSE 100 sheds 0.48 per cent to 6,861, while France’s CAC 40 rises by a mere 0.14 per cent to 4,793. Despite the partial US government shutdown enters the 26th day, Wall Street stocks poised to open with muted gains amid quarterly results that come out mostly strong so far.
The greenback is appreciating against most rivals as European currencies are under the pressure from Brexit-related political instability, while the yen demand ebbed amid a mildly positive risk sentiment. EURUSD suffered decent losses on Tuesday and proceeds with the bearish move today as traders continue to digest somehow ‘dovish’ Draghi’s speech delivered yesterday. The ECB Governor pointed to slowing growth in the region as well as to the inflation that is losing its steam as a result of lower oil prices. In short, Draghi made is clear for investors that the central bank won’t rush to hike rates just yet.
In another sign that the ECB policy will remain accommodative, Villeroy said rate increase would depend on economic situation and would be extremely gradual. He also pointed to slowing eurozone growth, though highlighted that the region was not in a downturn. Considering that the worsening economic growth conditions will likely persist this year, the risk of no action by the central bank in 2019 is rising. Next week, the ECB meeting takes place, and judging by recent comments by the officials, we should expect a cautious and ‘dovish’ tone from the monetary authorities which could further press the euro lower. EURUSD dropped to nearly two-week lows below 1/14 and looks set for further losses, though the downside pressure could be limited due to a lower dollar appeal amid a softer rhetoric by the Fed.
GBPUSD is trading in a directionless manner as traders are nervous ahead of no confidence vote later today. Should May survive the vote, it could bring some relief to the cable but the overall chaos within the Brexit process will hardly allow the pound to appreciate dramatically. Recent rebound attempts were due to diminishing prospects of a no-deal Brexit. During the last hour cable received another boost amid the reports that the EU is ready to make further offers on backstop to the UK. But the rise in the currency was limited and short term as the caveat here is that the initiative should come from Ireland.
On the data front, the UK CPI fell to its lowest level in nearly two years in December, in line with expectations. After a rise by 2.3% in November, consumer prices slowed growth to 2.1%. One of the reasons behind weaker results was falling fuel prices. Now traders are focused on the no confidence vote and further signals from the Brexit front that will keep the pound volatile. After a brief dip below 1.27 yesterday, GBPUSD has settled around 1.2850 and could move above 1.29 should May not lose a no confidence vote.
Brent crude failed to break above $61 as the price encountered a local resistance in the $61.20 region, from where it was rejected. The current sentiment in the oil market looks rather neutral as well as investor sentiment in the global financial markets. As long as there is no clear risk aversion globally, Brent will likely remain afloat as the major concerns on the supply-demand side are diminishing after a panic sell-off towards the end of last year. Technically, the barrel needs to firmly regain the $61 handle to stage a more sustainable recovery. Otherwise, unless fresh bullish headlines arrive, Brent may face some profit taking towards the end of the trading week.