It's just the same old things, day after day .... you can hardly say it's dull, though

Wednesday 14th November 2018

It's just the same old things, day after day .... you can hardly say it's dull, though

ref :- "Daily Briefing : Cabinet cliff-hanger on Brexit" , Reuters Markets Online

All the news agencies offer some kind of morning round-up, and if Reuters wouldn't necessarily be your first port of call if you were after hugely technical insights into the workings of markets, as you might expect they're pretty competent when reporting domestic and geopolitical developments that may lie behind market moves .... as they do now, for instance.

Regulars will be aware that we have considered attaching too much significance to every daily (hourly ?) Brexit report a mug's game, and for most mere mortals trying to trade sterling assets on the back of them is a recipe for being whipsawed. Even now as we approach the "endgame" as PM Theresa May put it, frankly it is little clearer where this will all end. This morning's performance of sterling - v - US dollar (a.k.a. "Cable") suggests that the suspicion that despite all intensive efforts it will not end well is growing. Cable got as high as $1.3033 yesterday as news of a potential agreement between negotiators from the two sides emerged. As we write, it has just traded down to $1.2900.

Mrs May will attempt to get backing for a deal from her cabinet this afternoon  --  which is far from guaranteed. If she's successful, she'll then have to get the backing of parliament. As it stands she will need to overcome opposition from a significant number of her own Brexiteer Tory MPs, the DUP MPs from Northern Ireland on whom her minority government relies for support, and from opposition Labour MP's who despite giving the impression of having no unified view on the subject will probably vote en masse against the government. We can take it as read that the strongly pro-European Liberal and SNP MPs will do the same as a matter of principle.

Thus the "deal" would be opposed both by Brexiteers who view it as one that ties the UK much too closely to Europe, and by Remainers who would want to be tied more closely .... it's not for nothing that we've offered some sympathy for Mrs May as she's faced what could prove to be an impossible task.

In that light, this morning's more soberly pessimistic view of sterling seems reasonable, even if levels of $1.40 or even $1.50 are being mentioned by some IF the deal gets through parliament. That's a big "if" , and perhaps more worryingly for those suffering Brexit-fatigue that vote might note take place until near-Christmas. This is a long way from over .....

Right up with Brexit is Italy, and she's catching the headlines too .....  The Italian government yesterday re-submitted it's draft budget for 2019 that the European Commission had rejected three weeks ago.. In most respects it was unchanged. They failed to adjust their growth forecast of 1.5% which the World Bank and others think should be more like 1.0%, and stuck with their plan for a budget deficit that will equate to 2.4% of GDP in defiance of previous agreements to cut Italy's total debt ratio.

Effectively Italy has said to the EC  : "We're not going to stray from our stated path or play by your rules ..... what are you going to do about it ?" . Theoretically, what they should do about it is to hit Italy with hefty fines .... or rather that's the sanction laid out in EU protocols.As ever though, it won't be that straightforward. Such fines have NEVER been imposed before despite numerous breeches of the rules over the years. It would take considerable time to have them ratified by other EU members, and there's no certainty that they would all agree anyway. The imposition of fines would generate considerable anti-EU feeling at a time when such sentiment is already fairly widespread, especially in nations with large nationalist support, or even government. And don't forget that the EU elections take place in May ..... the last thing that the EU would want is for a load of Nationalist MEPs running around Brussels and Strasbourg stirring up trouble.

Any realistic hope of compromise ? Maybe .... Italy's two deputy Prime Ministers who hold the reins of power , Matteo Salvini of the League and Luigi Di Maio of Five Star, don't sound in the mood for compromise just now but the EU has a long history of fudging hard decisions such as this (which is something the two deputy PMs may be relying on).  This story also has a long way to run .... and in the meantime the spread of Italian 10yr yields over Germany's  --  how much more return investors require to buy Italian sovereign debt rather than German  --  is heading north again. In all the anxiety ahead of the Italian budget last month the spread got out to over 330 basis points (3.3%), and narrowed to less than 280 bp when things calmed down. Today ? 310 bp as we write .....

What is it they say ? " It's like catching a falling knife "? So it might feel trying to call the bottom of the Oil market. Every time you think it might have got there President Trump blasts OPEC and others for not pumping more .... and of course Saudi Arabia would not be over-keen to upset Mr Trump at this particular juncture. The most recent leg down was exacerbated by worries about how slowing global growth will affect future demand.

But oil is trying to rally this morning, up about 1.25%, on rumours that OPEC is thinking about production cuts whatever the Donald might have to say. With recent lows of below $55 for WTI and $65 for Brent, we would be amazed if they weren't at least talking about it ....