Boris’ ‘Take It or Leave It’ Brexit Offer

Sterling is largely unmoved by Boris’ final Brexit offer; while global growth worries persist ahead of today’s crucial services PMIs

Previous Day's Market Highlights

Wednesday saw Prime Minister Boris Johnson unveil his proposals to replace the controversial Irish backstop and negotiate a new Withdrawal Agreement to allow an orderly Brexit on October 31st. The 'fair and reasonable' compromise is, however, a little complicated; with the simplest explanation being that the plan results in '2 borders, for four years'. The government's proposal would result in Northern Ireland leaving the Customs Union, along with the remainder of the UK, while remaining in the EU Single Market, aligned with EU regulations, for four years after the end of the Brexit transition period. The Northern Ireland Assembly would need to approve this plan first, then vote every 4 years whether to keep it in place. Despite both PM Johnson, and the DUP, believing that this plan can win over the EU, the idea of a time-limited backstop, and possible infrastructure on the Irish border, has previously been rejected by Brussels. Hence, agreement of a deal based on this blueprint will require significant concessions to be granted by the EU, and especially by Ireland. Therefore, in spite of comments from many EU sources that the proposals will be examined 'closely' and 'objectively', many believe that a deal is far from certain.

With the deadline for a deal being agreed just 10 days away, before this month's EU summit, sterling appears set for a bumpy ride, especially with the PM reiterating that the alternative to this plan is a no-deal divorce at the end of the month, despite the 'Benn Bill' requiring an Article 50 extension to be sought. For the pound, trading was driven by conflicting headlines and rumours, resulting in choppy conditions. Sterling ended the day 0.1% higher against the dollar, and 0.1% lower against the euro, indicating that the market is not getting its hopes up of a Brexit deal being agreed.

Stepping away from Brexit, Wednesday's trading session saw little in the way of major data releases, though risk appetite remained dampened after yesterday's disappointing US manufacturing data sparked further concerns over global growth. The deteriorating  risk environment boosted the yen to its best levels in a week, adding more than 0.5%. Treasury yields also fell, a sign of increasing demand, particularly at the short end of the curve as market participants continued to price in additional policy easing from the Fed. Yesterday's economic releases did little to alter this perception of the Fed's policy outlook, with September's ADP employment report showing a softer than expected 135,000 jobs added to the economy. The dollar settled 0.1% lower against a basket of peers.

Meanwhile, the trade war increasingly seems to be going global, with Europe the next target. Yesterday saw the World Trade Organisation (WTO) rule that President Trump can impose up to 7.5bln USD worth of tariffs on EU goods, as part of a dispute over state subsidies given to aeroplane manufacturer Airbus. While this had little impact on the euro, which ticked up by 0.2%, the ruling opens the door to a major escalation in tensions between the US and EU, likely to dent economic momentum in both economies.

Elsewhere, the Aussie and Kiwi dollars stabilised after Tuesday's steep fall, while the Canadian dollar sank to the bottom of the FX leaderboard, shedding 0.6%, as the loonie was dragged lower by falling oil prices. The Swiss franc also struggled, dipping 0.4%, as softer than expected CPI figures and yesterday's decline in manufacturing PMI, to the lowest level since 2009, exerted pressure.

In other markets, global equity indices continued to tumble on Wednesday, with global growth worries continuing to exert pressure. In Europe, the pan-continental Stoxx 600 closed 2.6% lower, while the US benchmark S&P 500 shed 1.8%. Finally, oil prices also lost ground, with a rise in US inventories combining with demand concerns to drive prices lower. Global benchmark Brent settled 2.3% lower, while US WTI crude shed 1.8%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1225 1.1381 1.1092 2.54%
GBP/USD 1.2295 1.2583 1.2233 2.78%
EUR/USD 1.0955 1.1110 1.0879 2.08%
GBP/AUD 1.8305 1.8496 1.7937 3.02%
GBP/NZD 1.9625 2.0003 1.9113 4.45%
GBP/CAD 1.6375 1.6691 1.6105 3.51%

Today's Market Highlights

Services PMI figures from around the global economy will be today's primary focus, with market participants set to pay close attention to whether the manufacturing malaise has spilled-over into the sector. Firstly, data from the eurozone will be in focus, with final data for September set to remain unrevised from the flash estimate, indicating a modest pace of expansion, with the index at 52.0. Such a level would represent the second straight decline in activity in the sector, while also representing the slowest pace of expansion since the beginning of the year. Shortly after, data from the UK is set to show the sector close to stagnating, with the PMI expected at 50.3. Taking into account that the services sector comprises approximately 80% of UK economic output, such a sluggish pace of expansion would likely raise further concerns over the health of the UK economy, increasing the chances of the BoE considering policy loosening. Finally, from the US, the ISM non-manufacturing activity gauge is expected to slow to 55.1, though this would still represent a strong pace of expansion, possibly allaying some concerns over the US economy.

Elsewhere, today's other releases are of lower importance, and likely to have a relatively muted, if any, market impact. From the eurozone, investors will glance over this morning's PPI and retail sales figures, while US weekly jobless claims and factory orders may also attract some attention. Overnight, retail sales figures from Australia will be in focus, with market participants attempting to gauge the health of the Australian economy, with the RBA considering further rate cuts.

Turning to monetary policy, today's calendar features a number of scheduled speeches. From the Federal Reserve, a host of speakers are due, including Vice Chair Clarida, Board Member Quarles and non-voters Mester and Kaplan. Meanwhile, remarks from BoE MPC member Tenreyro will be examined for any dovish comments, while comments from ECB Vice President de Guindos will also be in focus.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.00am EUR Final Services PMI (Sep) 52.0 52.0
9.00am EUR Composite PMI (Sep) 50.4 50.4
9.30am GBP Services PMI (Sep) 50.3 50.6
10.00am EUR Retail Sales (YoY - Aug) 1.9% 2.2%
13.30pm USD Initial Jobless Claims (Sep 27) 215k 213k
15.00pm USD ISM Non-Manufacturing PMI (Sep) 55.0 56.4