Sterling tumbles 170 pips or 0.93% to $1.2605 on PM May's decision to delay Tuesday's crucial Brexit vote in Parliament. May will address Parliament in a speech at 15:30 GMT/London. The gravity of the situation is highlighted by the unwillingness of the DUP and EU to renegotiate the Brexit Withdrawal Agreement as well as the low popularity of the vote. Japanese GDP was revised lower in early-week trading. The USDCHF Premium short was closed for 140 pip gain.
Watching Backstop AmendmentPM May was banking on the possibility of garnering sufficient support from several Labour MPs to counter the DUP's insistence to reject the vote. Whether May will table new amendments to Parliament such as the Backstop (potentially keeping the entire UK in the Customs Union so as not to trigger an Irish border) and/or to return to Brussels for further modifications is one issue. We expect May to suggest going to Brussels (again) for further negotiations, once she has (if) obtained new assurances from Brexiters.
A no-deal Brexit is the last resort. That kind of talk would roil markets and she would surely face a crisis of leadership.
Ultimately, there is no easy or obvious path for May or towards any kind of GBP-boosting Brexit deal. That's mostly priced in but until there's a concrete reason to buy GBP, it will continue to languish. The bigger picture is also a headwind for GBP. Risk aversion carried over from a dismal finish on Friday to more selling as markets opened for the week. Commodity currencies are under pressure and the Swiss franc is higher. S&P 500 futures have retreated back into the red at 2622 after an earlier trecovery into positive territory.
Non-farm payrolls were modestly weak and earnings were also a touch soft but the overwhelming concern is trade and slower global growth. The Fed may have played its best card with a pause signal to after a December hike but that boost has faded.
The dollar has so far maintained a bid but on acute risk aversion but it may come under pressure once sentiment stabilizes; especially against low yielders like CHF and JPY. Gold is also worth watching closely as it rallied above the October highs on Friday.
Early in the week, worries about global growth were sharpened by final Japanese Q3 GDP data. It showed a 0.6% q/q contraction, worst than 0.5% expected. Business spending was particularly soft.
Beijing might have a trade problem with the US, or it might be an IP theft problem but it could also be a power problem and that's why Meng Wanzhou's arrest is so important. The Swiss franc was the top performer Thursday while the Australian dollar lagged. US and Canada jobs are next. US average hourly earnings are expected at 0.3% m/m from 0.2% and unchanged at 3.1% y/y. Oil swings further amid conflicting reports of Iran's agreement to cut production.The Premium short in the Dax hit its final target for 650-pt gain. A new trade in another index was opened before the Thursday close.
China has some major strategic decisions to make and the arrest of Meng Wanzhou may crystalize the problem. In public, the US says it only wants China to narrow its trade surplus with the US and stop its companies from stealing IP. Yet there are reasons to believe that the US sees China as a rival in the bigger picture and rather than the long-held policy of growing together, Washington may now be pursuing a policy of economic containment.
If China believes it can continue with the growth-together policy then it would be in its interest to meet the White House demands. If, however, Beijing believes that by doing so, Trump would only ask for more in a never ending quest to remain the world's only superpower then its response will be different.
The arrest of Meng appears to be a strong signal that the US isn't looking for adjustments from China. Or at least it's increasingly looking that way from China's perspective. If it determine sthat the Trump administration is pursuing containment, then China has three options: 1) accept it and resign itself to a smaller part in the world (unlikely) 2) Fight back 3) Delay and pray that voters replace Trump with someone more amenable.
The third option is the obvious one, even if it means enduring another two years of wounds. However, the case for option 2 may be growing. A big reason is that Trump has been extremely successful in turning public opinion against China. We see this every day in increasing anti-China sentiment among normally level-headed market participants. It's like a Pandora's Box has been opened and something like a cold-war sentiment has settled in.
If China decides the US is pursing containment, then the trajectory of global growth in the years and decades ahead may be very different.
In that time, expect markets to struggle with the same question. For the moment, talk of an on-pause Fed after a December hike has salvaged market sentiment but expect continued volatility.
Two reasons Friday is certain to be volatile are the OPEC meeting and non-farm payrolls. There are rumblings that Saudi Arabia and Iran are at odds about Iran's participation. It was assumed Iran would be exempted because its exports have already been severely cut by sanctions but Saudi officials may see that differently. Talk so far is around 1mbpd, which is less than the market was hoping for, as seen by the 3% decline in crude Thursday. As for the jobs report, the focus will once again be on wage growth and a high reading could send markets back into a tailspin.
Selling intensifies in global indices, extending Tuesday's selloff --which was triggered by a combination of questions about the path of Fed policy and conflicting statements about the Trump-Xi deal. The latest wave of risk-off attack began at the open of futures 11 hours ago amid the announcement of Canada's arrest of Huwawei's Chief Financial Officer on behalf of the US. Meng Wanzhou is the daughter of Huwawei's founder and CEO as well as a former high officer at the Chinese Army. Accusations of spying are undoing the work of any deal done between China and the US, hence the selloff in the markets. The existing index short is currently 420 pts in the green.
S&P 500 futures are down 50 points to 2655, Dow futures down 450 pts to 24600 and the small cap index Russell 2000 suffering its worst day since November 2011. The bond market was rattled as well as 2 year yields rose above 3s and 5s in what might be the start of a classic recessionary signal. That thinking may have created a feedback loop in stocks and helped to spark such an aggressive move.
Another factor is commentary from the Fed's Williams. Almost struck a defiant tone on rate hikes, repeatedly touting the strength of the economy and implying that it was obvious to hike rates and saying that he expects further gradual hikes will be appropriate in 2019.
Perhaps the most-important factor was pushback from the Chinese. Multiple reports suggested China was unhappy with the style and substance of the White House's actions after the Buenos Aires meeting. There are indications they did not agree to what Trump's team said, or did not agree to take actions immediately. Instead, they plan to take them after a completed deal.
China watchers also say that Beijing doesn't believe in announcing part of the deal before it's done and that Trump's triumphant tone is insulting.
Despite the drops in equities and yields, FX continues to mostly take it in stride. Yen crosses fell with USD/JPY down a full cent to 112.70. JPY, GBP and CHF are all gaining vs USD. Commodity currencies also sank but it didn't have the sense of disorder that we saw in long-end bonds.
Cable is a chart to watch in particular. It very briefly hit a 18-month low below August support but it quickly rebounded. May lost a vote in parliament that forced her government to publish legal opinions on Brexit. More importantly, it was seen as a soft indicator on how the Dec 11 vote on the Brexit deal will go.
Loonie continues to be hit by the effect of plumetting oil as well a cautionary note from the BoC. A weekly close above 1.3450 could further induce CAD bears.