Friday, October 25, 2019

Safe haven assets gain after weak US economic data; Brexit delayed again, but for how long?

  • Dollar
  • Euro
  • Pound
  • Stocks

Market recap: Better-than-expected earnings reports continue to drive markets
Tech stocks led US equities on Thursday, with Tesla’s shares surging 17.67% after beating analysts’ expectations (and posting earnings per share (EPS) of US$1.86). Strong earnings reports from Microsoft and PayPal also helped push the Nasdaq higher, rising 0.81% to end the day. The S&P 500 also gained 0.19%. 3M shares plunged 4.07% despite beating EPS estimates, as it cut its full-year earnings forecast due to slowing demand in China. The DJIA retreated 0.11%.

Safe haven assets rose, as US Durable Goods Orders for September fell short of expectations of -0.7%, contracting 1.1% from August. Gold spiked 0.79% and the yen strengthened against the greenback by 0.07%. The Dollar Index gained 0.14%. US Treasury yields mostly remained the same, with 30-year yields gaining only 1bps to 2.26%.

In Asia, the Nikkei and Hang Seng Index started Friday’s trading session flat, while the Straits Times Index opened the day 0.18% higher.

Today’s analysis: All eyes on today’s meeting in Brussels
Sterling weakened 0.47% against the dollar on Thursday, after British Prime Minister Boris Johnson announced he would be calling for a general election for December 12th and would put the proposal to a vote in the House of Commons on Monday, October 28th. Labour Party leader Jeremy Corbyn has indicated that he will support a general election if there is no threat of a no-deal Brexit. Investors will be watching the meeting in Brussels today, October 25th, with EU officials set to decide on the next Brexit deadline extension.

The latest call for an election comes after Johnson’s recent loss in Parliament, where British lawmakers voted in favour of his Brexit agreement bill but then voted against the timeline of implementing it. While the EU can deny the UK a Brexit deadline extension, it is highly unlikely that will happen, as a no-deal Brexit would place the EU in a worse position. The focus instead will be on how long of an extension the EU will grant to the UK.

EU officials may follow previous extensions of three months, with a possibility for the UK to withdraw earlier. Another option is a two-tier extension, which will include a second specific date for the UK to leave the EU. But EU officials signalled that a decision may not be done today.

We expect EU officials to discuss the terms of an extension, but delay the decision until after Monday’s vote for a general election in the UK. If the EU does delay their decision today, then the Brexit deadline will still effectively be on October 31st, implying that a general election in the UK will be unlikely as Labour Party MPs are likely to vote against it. Then the EU could give a two-tier extension to apply some pressure to the UK to get Brexit done. In this case, Cable will likely remain little changed on Friday, ranging between 1.280 and 1.300. Then, sterling will possibly strengthen against the dollar to 1.310’s level if Parliament votes against the general election and the EU grants a two-tier deadline extension.

If instead the EU decides on an extension today and a general election manages to pass through the Commons on Monday, we will likely see sterling weaken because of greater uncertainty on Brexit. In that case, the pound may drop to 1.267’s levels.

*Source: ADSS

*Source: ADSS, TradingView
The bulls and bears are fighting for possession of Cable, with the bulls trying to keep sterling above the support level of 1.280 while the bears try to retest it. The Moving Average Convergence/Divergence (MACD) oscillator indicates a possible downtrend forming for Cable. If EU officials decides on a long Brexit extension, expect the bears to push past the 1.280 support level towards the second support of 1.267.