Markets tool last week's Brexit news poorly with sterling fall against euro

19 Nov 2018

Markets tool last week's Brexit news poorly with sterling fall against euro

Markets have taken last week's Brexit news poorly with sterling posting a nearly 3% fall against the euro from high to low.

Whilst markets are certainly worried over the prospect of the deal failing to pass parliament, the more immediate concern is whether Theresa May is able to survive the coming days and what the possible routes are thereafter if she does not. If there is to be a leadership challenge to the PM, next Monday has been rumoured as a potential day for a vote. Given rising uncertainty, near term risks to sterling are to the downside with volatility also on the up. However if the Tories remain so divided and the current deal cannot pass the Commons, we would not rule out the possibility of a cross party motion on a deal which could command a majority in the House.

US this week

The US is set to enjoy a holiday shortened week given Thursday’s Thanksgiving break and with Friday’s early market close. Nonetheless there are a couple of releases to keep an eye on. Of particular interest will be the housing market, where recent weakness in a number of metrics has raised some questions as to whether the Fed’s normalisation of interest rates is dampening the sector. Even Fed Chair Powell mentioned last week that interest rates were weighing on the sector. For the record the NAHB existing home sales, permits and starts are all due this week.

Europe this week

Data from the euro area is set to be relatively thin on the ground next week too. The key release will be the Composite PMI for November, where we expect a steady figure of 53.1. Recent months have witnessed a notable weakening in PMI readings, which we suspect is at least partly due to changes in auto emission standards and which should be temporary. However we are wary of global headwinds potentially weighing on activity. The second estimate of Q3 German GDP is also due for release, which will likely confirm the -0.2% q/q pace initially estimated. Attention will also focus on Italy as markets await the EU’s response to Italy’s unrevised 2019 Budget.

IRES to acquire up to 164 residential units / Dalata discloses Merrion Road details

In a statement released to Euronext at the market close on Friday, IRES REIT announced that it has agreed to acquire 164 residential units in Dublin. IRES will acquire up to 69 residential units at the Tara Towers site on Merrion Road under a development agreement with Dalata. The group will acquire these units on practical completion, which is expected to be on or around Q420 (with a long-stop date of Q421). The overall value of this deal is expected to be up to €47.2m (including VAT but excluding other transaction costs). 

The precise number of units to be acquired here is contingent on how the Part V obligations (Social and Affordable housing) is settled with the local authority. The units to be acquired by IRES here will be a mixture of townhouses and apartments, with a guided gross yield of c. 5.6% in year one rising to 6.09% by year three. In a separate transaction, IRES has acquired a 1.3 acre development site in Hansfield Wood for €3.325m (including VAT but excluding other transaction costs) from Garlandbrook Limited. The latter has agreed a development contract under which it will develop 95 apartments for a total consideration of €26.675m (including VAT but excluding other transaction costs). They will be a mixture of one-bed, two-bed and three-bed units and are expected to be completed by end-July 2020. 

The gross yield here is guided at c. 6.58% in year one rising to 7.11% by year three. With regards to Dalata, the group had previously indicated that it was exploring sale options on the residential units, so this agreement will not come as a surprise. It has also confirmed the development cost of the entire development (i.e. the 140-room hotel and residential component) is expected to be €51m and therefore, following this agreement with IRES, the net cost to the group is €9m. Dalata has appointed McAleer and Rushe, which is nearing completion on Dalata’s Clayton Hotel Charlemont Dublin and Maldron Hotel Newcastle, as contractors for the project.

Brexit update

Events over the weekend were relatively low key, but perhaps this was always likely, given the chaotic events last week. Ahead of the EU Summit on Sunday, Theresa May plans to fly to Brussels this week to take charge of the Brexit negotiations herself and speak with EU Commission President Jean-Claude Juncker. At some stage this week, the EU is expected to publish a fuller version of the draft political declaration of the future relationship with the UK, a seven page version of which was released last Tuesday. This compares with the 585 page Withdrawal Agreement, which technically is also in draft form. However it seems unlikely that at this stage, the EU will allow any major alterations to the treaty; reports are that EU chief negotiator Barnier is focused on the remaining ‘xxx’ in the text, with the offer of an extension of the transition out to 2022. 

At home the PM continues to face talk of a challenge to her leadership.  As we write, two more MPs had submitted letters publicly to Sir Graham Brady, the Chair of the 1922 Committee, taking the number to 25. This is 23 short of the number required to force a vote of confidence in Mrs May’s leadership of the party. It has also been claimed that a number of secret letters have also been lodged, although at the weekend Sir Graham was tight lipped over the number that he had received. He did mention however that Mrs May was likely to survive such a vote, should it take place.

Economic Forecast

09.15 EC ECB’s Nouy speaks
15.45 US Fed’s Williams speaks
16.30 US Fed’s Evans speaks