Market Brief: Tory split hits the pound

07 Feb 2018

Kevin Musisi

Dealing team

The current wave of risk off sentiment continued as the US markets opened sharply down yesterday. However, stocks rebounded over the session with the S&P finishing 1.7% up.

Today's data releases
  Key levels
09:00 EU ECB's Nouy + Lautenschlaeger speak      
11:00 Fed's Kaplan speaks
  Support Resistance
13:30 MBA mortgage applications GBP/USD 1.3886 1.4013
13:30 FED's Dudley speaks GBP/EUR 1.1231 1.1508

Market overview

Asian markets have been rather mixed overnight. In currency markets, the dollar was broadly higher yesterday, particularly against the pound, as GBPUSD dipped to a low of 1.3840. This has since recovered to 1.3950 this morning. Divisions within the Tory party continue to weigh on the pound, particularly in a week where all eyes are on Mrs May and her Brexit team to outline a Brexit plan – essentially the UK’s goals for the trading relationship it hopes to negotiate with the EU. The cabinet is split between those who want to stay close to the bloc and those who want to break free from EU rules. The most visible people in this are Chancellor of the Exchequer Philip Hammond and Foreign Secretary Boris Johnson. The PM certainly faces an uphill task in merging these opposing views and whilst initial hopes at the start of the week were for a plan to be finalised, murmurs from senior officials seem to suggest the March deadline for agreeing the terms of a transition phase now looks optimistic. Britain’s final proposal for its future customs relationship with the bloc is also not close to being ready.
 
Away from the markets, the US House of Representatives passed a stopgap funding bill that sees the government funded until 23 March and has now been sent to the Senate. A vote is expected today in the Senate, though amendments are likely to be made which would see it passes back to the House of Representatives. In a move to appease the Democrats, Senator McConnell noted that he will allow the Senate to debate the immigration bill later on if the government is not shut down this week. President Trump however, remains steadfast in his views and remarked “if we don’t change it [immigration laws], let’s have a [government] shutdown”. It could be a while yet till the Democrats and Republicans find some middle ground on this issue. Elsewhere, coalition talks between Ms Merkel and the SPD are still ongoing, but Ms Merkel seemed more conciliatory. She noted “all of us will have to make painful compromises…I’m willing to do this if we can ensure that the advantages outweigh the disadvantages”

The day ahead

Whilst the market continues to digest the moves in equities we’ve seen this week, we’re not expecting much in the way of data today before Super Thursday grabs the headlines tomorrow. However, Fed speakers today will likely dominate proceedings. 

Thought of the day

On this day in 1992 the twelve members of the European Community signed the Maastricht Treaty to form the European Union. It created the three pillars structure of the EU and brought about the creation of the single currency, the euro. The aim was to bring together the European Economic Community in areas such as foreign policy and the military. Once signed it then took a further 20 months for it to become effective by the time it had been ratified by the individual member states. It seems apt to be reminiscing about the creation of the EU when the UK is looking to be the first member state to leave! What effect will the UK’s departure have not only on our economic outlook, but also on the EU itself as one of the key economies in the bloc? We have seen an upward trend in the Pound since early last year but will this continue or will the Brexit negotiations continue to weigh heavily? Call the Investec dealing desk on 0800 055 6339 to get our views and that of our economists.

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