Monday, October 21, 2019

Earnings season continues; can Boris’ Brexit deal pass through the Commons this week?

  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Boeing and Johnson & Johnson’s woes push markets lower

US equities fell on Friday, as headlines regarding several companies including Boeing and Johnson & Johnson had a negative impact on investor sentiment. Boeing tumbled 6.79% after comments from a test pilot in 2017 indicated that MCAS, a flight-control system of the Boeing 737 Max (the company’s plane that was implicated in two fatal crashes), was flawed. Johnson & Johnson’s stock stumbled more than 6% after the Food and Drug Administration (FDA) found traces of asbestos in its baby powder, leading to a product recall. As a result, the DJIA sunk 0.95%, the S&P 500 fell 0.39% and the Nasdaq fell 0.83%.

US major indices ended the week mixed, as the DJIA lost 0.17%, while the S&P 500 and Nasdaq gained 0.54% and 0.40% from the previous week.

Safe haven assets rose slightly, with gold gaining 0.02% and the yen strengthening against the greenback by 0.06%. The Dollar Index grew by 0.01%. US treasury yields were mixed, with two-year yields losing 3bps to end at 1.57% while 30-year yields rose to 2.25% on Friday.

Equities in Asia opened mixed, with the Nikkei rising 0.22%, while the Hang Seng Index and Straits Times Index fell slightly by 0.02% and 0.01% on Monday morning.

This week, investors will be focusing on an upcoming vote in the House of Commons on the latest Brexit deal and the European Central Bank’s monetary policy decision on Thursday, October 24th 3.45pm (GMT +4).

Earnings season continues, with roughly 25 per cent of the S&P 500 set to report quarterly earnings this week. McDonald’s, Boeing, Microsoft and Tesla are just some of the prominent companies releasing data.

Today’s analysis: will British lawmakers vote for or against Brexit deal?

MPs in the House of Commons were set to vote on British Prime Minister Boris Johnson’s Brexit proposal on Saturday, October 19th, although it was delayed thanks to a new parliamentary amendment from former Conservative Party member Sir Oliver Letwin. Tabled on Saturday in the House of Commons, his amendment aims to prevent an accidental no-deal Brexit, by forcing Johnson to comply with the Benn Act (a legislation requiring Johnson to seek an extension if no Brexit deal had been approved by the Commons by October 19th) before his agreement is put to a parliamentary vote.

Sterling retreated from a five-month high of 1.2984 as a result, reaching as low as 1.2875. The chances, though, of a no-deal Brexit are now slim, as European Council President Donald Tusk declared over the weekend that he has received a deadline extension request from Johnson, and will confer with other EU leaders this week. The EU is unlikely to reject the request, but will probably delay the decision to wait and see just how much support Johnson has from British MPs for his Brexit plan.

While Northern Ireland Democratic Unionist Party (DUP) members will most likely vote against Johnson’s withdrawal proposal, a number of former Tories and Labour rebels have signalled they will support Johnson, meaning there could be a majority of MPs in the House of Commons that favour the deal.

We forecast that Johnson will bring forward the Brexit agreement to the Commons on Tuesday for its second reading. If the majority backs the deal in principle, then Johnson will likely try to push the withdrawal agreement through the Commons in as little time as possible to meet the October 31st deadline. The EU may grant Johnson a short extension to the deadline, if he is unable to meet it after the majority of Parliament shows support for the bill. Sterling will most definitely strengthen in this case, with GBP/USD likely breaking 1.297’s level to range between 1.300 and 1.310.

But if the majority of MPs vote against the bill, the EU will probably grant an extension. If that happens, GBP/USD will likely fall to a range between 1.267 and 1.280, as sterling weakens on renewed Brexit uncertainty.

Analysts expect the Brexit agreement to be backed by the majority of MP's

Expect large price movements this week during the Brexit deal vote (H4)

GBP/USD is on a bullish trend as the market expects the majority of British lawmakers to vote in favour of Johnson’s Brexit deal. Expect Cable to range between 1.30 and 1.28 before the House of Commons vote. If the majority supports the deal, expect the bulls to charge forward, likely breaking the resistance of 1.300 to range between 1.300 and 1.310.