Intraday Market Thoughts

DUP'ing May & ECB Tiering

by Adam Button
Mar 28, 2019 15:20

UK PM Theresa May promised to resign if her Brexit deal passes through parliament in a final bid to make Brexit happen but the pound gave up all of its gains on renewed dissent from the DUP. The USD is up across the board with gold and silver underperforming FX vs USD. EURUSD accelerated its declines after German CPI came in at 1.3% vs exp 1.5%. Full detail on the ECB's suggested tiering approach to rates is found below.  A new trade has been posted for Premium subscribers along 2 charts & notes.

كيفية إستغلال التداول العرضي (فيديو للمشتركين فقط)

May's promise was initially met with optimism as Rees-Moog, Johnson and Duncan Smith all said they would support her deal now. However there are signs that 12-25 ERG members will still vote against it. The pound then gave back all its gains when the DUP said they would vote it down (not abstain as was hoped).

The vote will likely come on Friday so there's still time for May to lobby MPs. Her best hope might be getting some Labour MPs on side. She needed to switch 75 votes from the last round and could get as many as 60 ERG votes on her side but getting more will be a monumental challenge.

It's probably premature to wonder if there will be a MV4 if she loses by 20 or fewer votes but it can't be ruled out. At the moment, the EU's conditional deal to extend Article 50 to May 22 depends on a successful vote. They could instead demand a longer extension.

Outside of Brexit, the bond market continues to flash warning signs. There were fresh worries Wednesday from Chinese industrial profits, and the China Beige Book. US 5-year yields fell as low as 2.11% and the market is now pricing in a 78% chance of a Fed cut before year end. US 10 yr yield is bouncing off its 200-WMA after testing for the 1st time since September.

ECB Talks Tiering

In displaying European banks' displeasure with negative interest rates, the ECB floated the idea of a tiered negative rates system in order to preserve banks profitability. This would be done by setting zero interest rate to some excess reserves and not the negative interest rate, currently charged on deposits. All in all, this could be a measure by the ECB to demonstrate that it is not running out of amunition (in case the targeted LTRO does not work). If the tier system nears reality, it would imply a justification to keep rates low for longer ... at the expense of the single currency.  German 10-year yields fell 6 bps to -0.06% -- the lowest since October 2016.

Act Exp Prev GMT
Eurozone Spanish Flash CPI (y/y)
1.3% 1.4% 1.1% Mar 28 8:00

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