15 Oct 2018
Brexit optimism evaporates over the weekend
Optimism surrounding prospects for a deal at this week’s EU Summit have evaporated over the weekend. This is hardly a surprise, bearing in mind that both trade deals and EU discussions only tend to be settled at the very last minute.
Three factors remain obstacles to a settlement. First, and this emerged over the past day or two, it had been envisaged in some quarters that the NI backstop would see the UK and the EU remaining in a customs union without an end date, at least until a primary solution was settled. This proposal resulted in a huge degree of pushback from a number of Theresa May’s Conservative colleagues. Second, not only is the DUP still implacably opposed to any sort of goods checks between GB and NI, it has now been joined by a number of Scottish Tories. Third, we are highly sceptical that Westminster will (and certainly should) sign any withdrawal agreement without sufficient and material progress on the shape of the future relationship between the UK and the EU. To our minds a very loosely worded political declaration simply will not do. We would also note of course that any agreement between the two parties also needs to get through Westminster, which will be a considerable challenge as well. Even so, we remain convinced that a deal will be done, but probably not until the 11th hour. Sterling is not much softer this morning, having reversed some of its rally late on Friday. The pound currently stands at $1.3120 and 88.1p against the euro.
Irish Banks: Finance Minister suggests bank stake sales delayed until after Brexit?
In a wide-ranging interview with The Sunday Business Post published yesterday, Irish Minister for Finance Pascal Donohoe acknowledged that equity valuations in certain sectors had been impacted by the political uncertainty created by Brexit, and that his Department would be keeping this issue under review in regard to the Irish government’s remaining ownership stakes held in the Irish banking sector. The paper reports that the Department of Finance has been seeking advice on when the best time to sell these stakes may be amid this uncertain political and equity market backdrop, but that it may be delayed until after Brexit as a result.
US this week
Amidst concerns over the pace of Federal Reserve tightening, Wednesday’s minutes to September’s Federal Open Market Committee meeting is likely to be a key focus for markets. Although the minutes relate to discussions held prior to the sharp rise in Treasury yields, they will nevertheless provide further precision on factors that might push the Fed onto a more aggressive tightening path. Secondly, given the focus on valuations, we would expect the continuing run of Q3 corporate earnings results to be particularly important for global sentiment.
Europe this week
In the Euro area, with top tier data releases relatively scarce, politics will also be a significant focus with Italy front and centre once again. Today represents the deadline for the Italian Cabinet to send its draft Budget to the European Commission. As such, Italian bond and euro markets will be closely eyeing the fiscal consequences of the package presented. With risk sentiment having been severely shaken over the past week as investors reacted to the recent rise in US Treasury yields, bringing investors to fret about high valuations, particularly in the likes of the technology sector, all eyes will remain on global equity market moves over the coming week.
China this week
For the risk backdrop we also note that China GDP figures due on Friday will be important and especially so given questions about the squeeze applied by new US-China tariffs. On the subject of this spat, the US Treasury Department report on currency manipulation is due during the week, so we flag the high possibility that this lays further blame at the door of the Chinese administration and could therefore reignite tensions between the two nations.
UK this week
The big focus will be on Brexit which remains the predominant driver of the pound. Here the focal point will be the meeting of EU leaders over dinner on ‘Article 50’ (i.e. the UK’s exit process) on the 17th October, though we note that the Summit does extend through to the 18th. While negotiations, particularly surrounding the NI border situation have hit an impasse (detailed note below), EU leaders will still be aiming to get as close as possible to an agreement on the divorce treaty whilst accepting that much more ground needs to be covered on future trading arrangements. If they are satisfied that enough progress has been made, they will likely ‘green light’ a November Summit being scheduled, to tie things up further. There is a whole host of data due including CPI inflation, retail sales figures and the latest labour market report.
09.30 IT Italian Deputy Salvini speaks
10.15 EC ECB’s Angeloni speaks
13.30 US Retail Sales
17.00 EC ECB’s Nouy speaks