Christmas Election Replacing A Halloween Brexit?

Sterling struggles as political uncertainties mount; the euro stumbles as PMIs continue to disappoint; politics to remain in focus today

Previous Day's Market Highlights

British political uncertainty ratcheted up a notch on Thursday, as Prime Minister Johnson launched his third bid for an early general election in an attempt to break the Parliamentary deadlock over Brexit. The Government announced that, on Monday, a motion would be tabled allowing Parliament to vote on holding an early general election on December 12th, under the terms laid out in the Fixed-term Parliaments Act. This Act may, however, pose a problem for the Government, with the motion being tabled requiring a two-thirds majority in order for an early poll to be called. This two-thirds majority looks uncertain at present, with opposition parties remaining hesitant to back an election until an extension to Article 50 has been secured. 

Speaking of extensions, it appears that the PM's attempts to dissuade the EU from allowing a Brexit delay have fallen on deaf ears. EU27 ambassadors seem to have decided to grant the UK a 'flexible' extension until 31st January 2020, which would allow the UK to depart the EU earlier than that date if the Withdrawal Agreement had been fully ratified. It is now extremely unlikely that Brexit will take place on the 31st October; with the prospects of a Hallowe'en Brexit seemingly having been replaced by a Christmas election. 

For the pound, mounting political uncertainties resulted in significant downward pressure. Against the dollar, sterling slide to a 1-week low, briefly below the $1.28 handle, before regaining some ground to settle 0.6% lower. The pound also slid to a 1-week low against the euro, closing with losses of around 0.35%.

Meanwhile, markets said arrivederci to ECB President Mario Draghi in rather uneventful fashion; with Super Mario's era at the helm of the ECB ending with no changes to monetary policy. Draghi would not be drawn on his favourite moments at the helm, or what he plans to do next, saying that we should 'ask his wife' instead. The euro, however, struck a softer tone; not as a result of the ECB, but after another round of appalling PMI surveys. October's flash data showed the economy almost stalling, with momentum remaining incredibly fragile. The surveys showed the manufacturing sector contracting for a 9th straight month, the PMI printing 45.7, while activity in the services sector also softened, the PMI reading 51.8. The common currency ended the day around 0.35% lower.

Across the pond, softer than expected durable goods orders failed to significantly dent the dollar, which was supported by Vice President Pence striking a less aggressive tone on US-China trade. Data showed orders fell by a worse than expected 1.1% in October; a fact which bodes poorly for the production sector in the months ahead, when warning lights in the industry are already flashing red. However, the dollar shrugged off the figures, instead focusing on Pence's comments that the US "does not seek confrontation" with China, and that the US is ready for a "new future" if China ends unfair trade practices. The dollar ended the day 0.25% higher against a basket of peers. The improvement in risk sentiment briefly helped both antipodeans to reverse some earlier losses, though the strength could not be maintained. The Aussie dollar settling 0.45% lower, and the Kiwi dollar settling 0.7% lower.

Away from FX, equity markets rose on both sides of the Atlantic, continuing to be buoyed by upbeat corporate earnings. In Europe, the pan-continental Stoxx 600 closed 0.5% higher, while the US benchmark S&P 500 gained a shade under 0.2%. Finally, oil prices chalked up their third straight daily gain. Global benchmark Brent settled 0.9% higher, while US WTI crude added 0.45%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1565 1.1661 1.1086 4.93%
GBP/USD 1.2845 1.3012 1.2195 6.28%
EUR/USD 1.1105 1.1179 1.0879 2.68%
GBP/AUD 1.8815 1.9094 1.8076 5.33%
GBP/NZD 2.0140 2.0559 1.9311 6.07%
GBP/CAD 1.6785 1.7095 1.6191 5.29%

Today's Market Highlights

The trading week concludes with a relatively light economic calendar, though political developments should give market participants plenty to chew over. On Brexit, markets will be paying close attention to this morning's planned meeting of EU27 ambassadors, at which an Article 50 extension may be agreed. As mentioned above, it is likely that the EU grant a 'flextension' to 31st January, allowing the UK to leave early if the Withdrawal Agreement is ratified. It is important, however, to note that some EU leaders are reportedly reluctant to grant an extension until the UK's political plans become clearer, potentially delaying a decision until next week. Meanwhile, in Westminster, focus will remain on whether the Prime Minister will have the numbers in order to achieve the necessary two-thirds majority to hold an early election. The latter point will likely hinge on the first, with opposition parties reluctant to openly back a poll until a Brexit delay has been confirmed.

On the data front, today sees a couple of notable releases. From the eurozone, the monthly German IFO sentiment surveys will be eyed, with business optimism set to hover close to its lowest levels since November 2012. In the US, attention will be on October's final consumer sentiment figures from the University of Michigan, expected at an unrevised 96.0. Any signs of softness, or downward revisions, will likely weigh on the dollar with consumer spending the primary factor underpinning the current pace of economic growth.

Turning to next week, a number of key monetary policy decisions are due. Of most importance for markets will be the Federal Reserve's latest announcement, with the FOMC set to announce a third 25bps cut in as many meetings; with policymakers continuing to provide the US economy with 'insurance' against downside risks. Meanwhile, the Bank of Japan (BoJ) are set to preserve their precious little policy ammunition and keep rates on hold; while the Bank of Canada (BoC) may be considering loosening policy as global growth headwinds intensify and the Canadian economy begins to show signs of softness.

Meanwhile, on the data front, third quarter GDP figures are due from both the US and the eurozone, with growth set to continue at a subdued pace. Also in focus will be third quarter CPI figures from Australia, along with October's flash eurozone CPI data. Markets will also be focusing on the monthly US labour market report, set to show hiring continuing to slow. In the UK, Monday's vote on an early election will be eyed, while Thursday is still the legal default date for leaving the EU - though a Hallowe'en Brexit is unlikely to occur.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.00am EUR Germany IFO Survey - Business Climate (Oct) 94.5 94.6
15.00pm USD Final University of Michigan Consumer Sentiment Index (Oct) 96.0 96.0