Wednesday, September 11, 2019

Boris Johnson is optimistic about negotiations with the EU, but is a deal possible?

Tags
  • Dollar
  • Gold
  • Euro
  • Pound

Market recap: UK parliament suspended as Boris Johnson moves for Brexit with or without a deal

Following the second rejection of UK Prime Minister Boris Johnson’s call for a snap election, the UK parliament has started its five-week suspension and will reopen on October 14th – two weeks before the October 31st deadline for Brexit and three days before the EU Summit begins. During this time, Johnson is expected to try and renegotiate the UK and Ireland backstop issue. It was a critical part of former PM Theresa May’s Brexit deal that was rejected by parliament. Failing that, he is tipped to either try to take a no-deal Brexit despite a new law being passed that requires him to ask for another extension, or revert to a Northern Ireland only backstop (which has been rejected by the Northern Ireland Unionist Party). He has also made it known he prefers a no-deal Brexit as opposed to  any backstop involving the UK or Northern Ireland.

The UK released its average weekly earnings and unemployment rates figures, which revealed that average weekly earnings beat estimates by 0.3% at 4%, while the unemployment rate also beat estimates and decreased to 3.8% month-on-month. This suggests the outlook for the UK economy is on the up, as an increase in average weekly earnings, coupled with a lower unemployment rate, is likely to signal an increase in consumer spending. The flourishing figures released from the UK yesterday, together with the optimism that Johnson has expressed towards getting a deal with the EU, saw sterling surge and reach nearly 1.2380’s level, its highest in more than a month. However, the pound’s current rise can only be sustained if Johnson can secure fruitful negotiations with the EU – and as of now, the chances of that happening remain low.

In the US, markets ended the day on a slightly more positive note. The DJIA closed 0.28% higher while the S&P500 remained mostly flat, with a slight increase of 0.03% as energy and industrial shares balanced off the drop-in tech and real estate industries. The Nasdaq slightly contracted by 0.04%. The Dollar Index increased slightly by 0.03% to 98.36’s level.

US Treasury yields also rose: two-year yields climbed to 1.69%, reaching their highest level since August 2015, while 10-year yields increased by 10 basis points to hit a new high of 1.74% in a month. 30-year yields also climbed higher by 9.9bps to 2.23%, their highest level since August 2012. The price of gold and the Japanese yen fell further to 1480’s level and 107.60’s level respectively. The rise in US treasury yields and safe-haven assets signals that investors are moving away from safe-haven bonds due to a mellowing of trade war tensions between the US and China.

 

Today’s analysis: Is Johnson really looking for a Brexit deal? Focus on the US’s PPI before the massive monster ECB policy meeting

While Johnson has declared the UK will leave the EU on October 31st, with a new deal or without one, both the market and the EU do not agree with the British PM. His Brexit strategy is easy to understand - he thought that suspending parliament would stop MPs from blocking a no-deal Brexit, and that would be his main bargaining chip to force the EU to compromise on the Irish border backstop controversy.

Instead, parliament has scuppered his plan. Rebel Tories voted against a no-deal Brexit, opposition parties voted against a general election (even though it’s assumed an election is exactly what the main opposition party Labour wants), and MPs passed the aforementioned law to stop the government opting for a no-deal departure from Europe. All those key factors have strengthened the confidence of the EU – it knows it doesn’t have to compromise with Johnson. Boris, in reality, can no longer pass any legislation (even if he secures a renegotiated deal) without approval from his fellow MPs. The EU can now wait until parliament reopens in the middle of October and see whether the government will ask for a Brexit extension, or if the UK public will be asked to vote on the matter at a new general election. It is expected to be a big ask for Johnson to get the EU compromise on the current Brexit deal while parliament is suspended.

Now a no-deal seems to be off the table, the markets are feeling more optimistic, but the outlook for Brexit is still full of uncertainties and it may take a general election to break the deadlock. But can the Labour Party or the Conservatives gain a big enough majority in the House of Commons to secure more bargaining power to deal with the EU? Sterling could fall again to test its previous low at 1.1980’s level in the next five weeks if there are any negative headlines about negotiations between Boris and the EU.

Trade war tensions between the US and China seem to be less of a concern for the market this week, as both countries are tipped to wait until October’s meeting to decide whether they will escalate tariffs in December. The price of gold and the Japanese yen could keep falling this week as a result. The market spotlight will focus on the ECB policy meeting tomorrow, and beyond that, at GMT +4 16:30 today, the US will announce its PPI for August. The market consensus has it at 0.2%, higher than the prior -0.1%. The figure may see the dollar rise during the day.