Market recap: Equities tumble as trade war and political crisis chatter hots up
US indices fell sharply across the board last night amid new tension surrounding the US China trade war, plus the political future of US president Donald Trump. US House Speaker Nancy Pelosi announced yesterday there will be an official impeachment inquiry into Trump, in relation to a whistleblower complaint lodged against the president. Prices did though recover slightly when Trump announced he would release a complete transcript of the call on Wednesday.
Meanwhile, another disagreement over trade between the US and China caused more market jitters. Trump declared on Tuesday at the United Nations climate change summit in Texas that he will not accept a, “bad deal” from the Asian superpower. The DJIA closed 0.53% lower, while the Nasdaq sank 1.46%. The S&P 500 dropped 0.84%, its biggest decline in a month. The Dollar Index retreated 0.3% by the end of the day. The US Consumer Sentiment Index largely missed expectations of 133.5, and fell to 125.1 in September.
Asia shares had a tough day as well. The Hang Seng Index opened 0.45% lower and the Straits Times Index opened 0.61% lower.
Sterling, though, had a better day. It recovered after the UK Supreme Court ruled prime minister Boris Johnson’s decision to suspend Parliament for five weeks was unlawful, making the likelihood of a no-deal Brexit less likely. Investors will adopt a wait-and-see approach to the ruling and the impact it could have on Johnson’s Brexit plans.
Gold continued to gain as demand for safe haven assets surged in response to chatter about the growing political crisis in the US. The yen gained as much as 0.3% against the dollar, hitting as low as 106.98 on the day.
US Treasuries rallied, with yields sinking across the board. 10-year yields fell the most by 9bps to 1.64% and two-year yields slipped 6bps to 1.61%.
Today’s Analysis: What now for Brexit?
The UK Supreme Court’s decision means Parliament will resume from 2.30pm (GMT +4) today. Sterling rose by nearly 0.2% after the ruling, in part because the chances of Parliament ever approving a no-deal are pretty much non-existent. MPs recently approved a law preventing Johnson from agreeing to a no-deal, and forcing him to accept an extension to Article 50 if no exit agreement is rubber-stamped by October 31st.
But if Johnson doesn’t agree to a deal and decides to not seek for a deadline extension, a legal battle will ensue. It is also important to note that although Johnson is legally obligated to seek an extension, the EU can reject any request. There is also the thorny issue of whether Parliament will accept any deal put forward by Johnson, and extending Brexit into 2020 will most likely cause more market uncertainty.
Such a strategy, though, could backfire on Parliament. A delay would allow Johnson to call a general election and attempt to secure a two-thirds majority vote in the House of Commons. The election could allow his Conservative Party to regain a majority, which would allow Johnson to more easily deliver his vision of Brexit.
Currently, the Commons is unlikely to support a call for an election. Johnson needs 434 votes in order to send the public to the polls, but only 293 voted in favour of a snap election back in September. Alternatively, Johnson can either pass a law that calls for an election on a specific date (and would require only a simple majority in the Commons) or call for a vote of no confidence in his own government.
We forecast the Brexit deadline will be extended to January 31st 2020 and an extension is likely to see sterling rise to 1.250’s level. Alternatively, the UK could exit with an acceptable trade deal, which could potentially send sterling past 1.255’s level (depending on the details of the deal). A no-deal Brexit is unlikely to happen now, as it will negatively impact the UK and EU economies.
If the Conservative Party regains the majority in the Commons, sterling is likely to descend closer to 1.240’s level.