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Daily Brief - 11/12/2018

London Office


British Pound


Reuters: Sterling tumbled to its weakest since April 2017 on Monday after Prime Minister Theresa May pulled a parliamentary vote on her Brexit deal with the European Union, panicking investors about deepening political uncertainty in Britain. May said on Monday she was delaying the planned vote as her deal would likely be rejected “by a significant margin”. Colleagues had told May that she faced a rout in the vote, that was set for Tuesday. The move thrusts Britain’s exit from the European Union into turmoil, with possible options including a disorderly no-deal Brexit, another referendum on EU membership, or a last minute renegotiation of May’s deal with Brussels. May said she would do all she could to secure further assurances from the EU on the so-called backstop arrangement, a crucial part of the deal bitterly opposed by many of her fellow conservatives and opposition parties. “Uncertainty is the only thing hitting the pound at the moment,” said Kallum Pickering, an economist at Berenberg.

The pound fell 1.6 percent against the dollar to as low as $1.2507, most of the loss coming after May confirmed she was delaying the vote. Against the euro, the pound dropped 1.5 percent to as weak as 90.875 pence, its lowest since August, before recovering some ground in late European trading. Britain's exporter-heavy FTSE 100, which usually rises when sterling falls, succumbed to widespread selling pressure and fell 0.8 percent as investors fretted about the consequences of the political chaos for UK companies. The more domestic FTSE 250 index tumbled 2 percent. Perceived safe-haven British government bonds rallied, with 10-year British government bond yields falling 7.5 basis points to 1.19 percent, the lowest since mid-August. While the government considers when to next hold a parliamentary vote, it is stepping up contingency planning for a no-deal Brexit when it is due to leave on March 29. The pound has fallen for four consecutive weeks, with traders struggling to comprehend the vote options and consequences of more political instability. Earlier on Monday, the EU’s top court ruled that Britain could unilaterally reverse its decision to leave, easing concerns about Britain crashing out of the bloc in March without a deal. But analysts said sterling’s weakness on Monday reflected concerns about May’s future as prime minister and the worsening uncertainty. Some analysts saw a silver lining in May’s decision to postpone the vote. Pickering at Berenberg said the delay would end with the British parliament gaining a greater say on the withdrawal agreement and the sort of Brexit that the UK gets. This is ultimately a process towards softer Brexit so the pound is reacting more to the uncertainty because, from my point of view, this is mostly a positive development,” he said.


US Dollar


Reuters: Safe-haven bids stoked a comeback for the greenback which suffered its steepest weekly drop versus a basket of currencies in three months last week. The dollar’s snapback was limited as traders reduced their expectations that the Federal Reserve might pause its interest rate hikes sooner than previously thought. The greenback strengthened versus a basket of currencies that includes the euro as traders trimmed their earlier bets on a less aggressive Federal Reserve. Widening interest rate differentials between the United States and the rest of the world, driven by a confident U.S. Federal Reserve, has fuelled an unlikely dollar rally this year. However, weak data in recent weeks has clouded the currency’s prospects for next year. “You are getting a bit of reprieve from a very dovish view for the Fed in the next 12 months,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.

The futures market implied traders expected the U.S. central bank to raise key lending rates by a quarter point at its Dec. 18-19 meeting to 2.25-2.50 percent, marking its fourth rate hike in 2018. They now saw no more than one rate increase in 2019, down from two a month ago, according to CME Group’s FedWatch programme. An index that tracks the dollar versus a group of six currencies was up 0.74 percent at 97.232 after falling 0.78 percent last week.


South African Rand


BDLive: The rand fell on Monday to its lowest level against the dollar in almost a month as traders braced for more volatility after British Prime Minister Theresa May called off a parliamentary vote on her Brexit strategy, setting the scene for more turmoil in global markets. A messy Brexit could hamper economic growth in the UK and the rest of the EU, which is still SA’s biggest trading partner, despite the rising importance of countries such as China and India. This could weigh on the rand and increase the likelihood of the Reserve Bank hiking interest rates. Violent protests in France, fear of a trade war between the US and China and poor economic data from Asia added to a sell-off of risky assets. Sentiment was also hit by news of the unexpected resignation of India’s central bank governor after a clash with the government. Implied one-week volatility in the rand against the dollar jumped above 20% to the highest since mid-September, according to Bloomberg data, which also showed that the currency’s 1.39% drop against the greenback was the biggest among 31 currencies.

The rand tends to move disproportionately when there is turmoil in financial markets as it is one of the most liquid of the emerging-market currencies and often sold to help cut overall exposure to riskier assets. At 6pm, the rand had dropped 1.95% to R14.4545/$, after earlier weakening by as much as 1.99%, the weakest since November 13. Against the euro, it had fallen 1.8% to R16.4349/€ and it was 0.44% weaker against the pound at R18.0858/£. The pound had fallen 1.7% against the dollar to its weakest level since April 2017. May’s decision to pause the Brexit vote would be viewed poorly by the market, said Herenya Capital Advisors founder Petri Redlinghuys, citing an uncertain environment faced by companies trying to find ways to mitigate the effects of the UK’s departure from the EU, set for March 29 2019. "We are seeing a realisation that things in Europe are getting messy, and economic growth is looking extremely fragile," Redlinghuys said. Renewed volatility in the rand could be seen as vindication for the Reserve Bank raising interest rates in November for the first time in more than two years. The Bank warned then that the relative calm in emerging-market currencies might not last long. Prolonged currency weakness that pushes up the cost of imported goods, including fuel, could prompt the central bank to act again as it seeks to move inflation closer to the midpoint of its 3%-6% target range. Also weighing on the rand was the crisis at Eskom, leading to the return of load shedding, Investec economist Annabel Bishop said in a research note. If power cuts persisted well into the first quarter of 2019 and reached the sort of levels that were experienced early in 2008, it could hit sectors such as mining and manufacturing hard, she said. "Overall, if load shedding is as persistent and extreme as it was in 2008, that could see growth cut by as much as a third to a half.


Global Markets


Reuters: Chinese shares pulled ahead on Tuesday after Beijing confirmed it was still in trade talks with the United States, though sentiment remained fragile in Asia as the pound wallowed near 20-month lows on deepening political turmoil over a Brexit deal. Chinese Vice Premier Liu He spoke with U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer on Tuesday, exchanging views on pushing forward the next stage of trade talks, China’s Commerce Ministry said. The news soothed sentiment somewhat although there were still uncertainties over the prospects for a lasting resolution to a trade dispute that has turned increasingly bitter in the past several months. Chinese shares opened in the positive territory with the blue-chip index up 0.3 percent. Australian shares gained 0.2 percent while the Aussie bounced too. However, that barely helped MSCI’s broadest index of Asia-Pacific shares outside Japan which was languishing near a 3-week trough.

Japan’s Nikkei reversed early gains to be down 0.3 percent and Hong Kong’s Hang Seng index eased 0.4 percent. Analysts expect investors to remain cautious given the uncertainty around a durable trade deal between China and the United States. “Remember this isn’t the first time these backroom negotiations have dangled a carrot in front of the markets,” said Stephen Innes, head of APAC trading for OANDA. “And while I view this development as positively significant in the broader context, a trade war is far from over.” Among emerging markets, investors will focus on India where the central bank governor shockingly resigned on Monday. “Urjit Patel’s resignation for ‘personal reasons’ goes to reinforce the widened rift between the central bank and the government,” said Robert Carnell, Asia-Pac chief economist for ING. “The news is clearly a significant negative for the markets.” Singapore Nifty futures slumped almost 2.5 percent on Tuesday to a near six-week trough, indicating a weak opening for Indian shares. The euro hit a three-month peak versus the pound at 90.875 pence. It was last up 1.06 percent at 90.475 pence. The single currency’s gains were limited by the violent protests in France against President Emmanuel Macron’s economic reform. In commodities, oil prices echoed the weakness in global stock markets amid worries about a slowdown in demand, dropping 3 percent on Monday.U.S. crude futures were last up 27 cents at $51.27 per barrel. Brent added 39 cents to $60.36.


Daily Brief - 11/12/2018

Hong Kong Office


British Pound


FXStreet: The Great British Pound tumbled through trade on Monday, crashing through 20 month lows after Theresa May pulled a parliamentary vote to ratify her European withdrawal agreement. Amid increasing speculation, a catastrophic defeat could force the embattled PM from office, May aborted plans to put her exit strategy to parliament raising fresh concerns Britain’s political instability will derail an otherwise orderly common market exit. Sterling tumbled through 1.27, 1.26 and 1.2550 touching intraday lows at 1.2512 as uncertainty reigned supreme and sent investors scurrying for have plays.

The move leaves three scenarios on the table moving through the end of the year and the March 2019 deadline. If May cannot negotiate a last-minute deal with Brussels that will appease her detractors at home the UK will either be forced to suffer a humiliating and disorderly exit from Europe’s common economy or announce another referendum on EU membership.

WE expect Sterling will remain under pressure as the market continues to adjust expectations amid political instability and an ever-evolving Brexit platform. As we move closer to the March divorce deadline headlines that point to a no deal break could force a further 3%-4% depreciation as investors attempt to account for the broader economic costs and impact.


US Dollar


Reuters: The pound struggled near a 20-month low against the dollar on Tuesday after British Prime Minister Theresa May postponed a crucial vote on her Brexit deal. Sterling was little changed at $1.2565 after slumping 1.3 percent the previous day, when the currency brushed $1.2507, its lowest since April 2017. The dollar index, a measure of the greenback’s strength versus a group of six major peers, advanced 0.75 percent on Monday and was back firmly above 97.00. At one stage in overnight trade it had fallen to 96.364, its lowest since Nov. 22. 

“Falling U.S. yields will eventually nudge the dollar into a downtrend, but probably not at this moment,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “There just isn’t enough demand for the yen, which is less of a safe haven, and the euro, with the political concerns in Europe. And there is of course the pound which is burdened with Brexit problems.” The 10-year Treasury note yield US10YT=RR has dropped to a three-month low this week, with dovish comments from Fed officials and soft U.S. data further sharpening views on an imminent pause in the tightening cycle. 

The dollar was a shade lower at 113.19 yen after advancing 0.5 percent overnight. The euro was flat at $1.1354 after shedding 0.2 percent on Monday. Indian rupee forwards fell more than 1 percent on Monday, posting their biggest daily slump in more than five years. The Australian dollar was little changed at $0.7188 after slipping on Monday to a one-month low of $0.7170.


Japanese Yen


FXStreet: Despite the sell-off in Wall Street continued and government bond yields that remained depressed, the dollar surged against the safe-haven yen, with the USD/JPY pair surging past the 113.00 level, to finish the day with gains around 113.20. The pair started the day re-testing the 100 DMA in the 112.20 level, but yen's gains were capped by soft local data, as Japanese GDP shrank 0.6% in the 3-month to September, worse than the -0.5% expected, while the annualized reading printed a disappointing -2.5%. 

The October current account balance stood at a surplus of about ¥1.3 trillion, well below previous as the trade balance posted a deficit of ¥321.7B. The Eco Watchers November survey brought some hopes, as the assessment of the current situation improved with the index up to 51.0 from 49.3 and the outlook surging to 52.2 from 50.6. Japan will release the Q4 BSI Large Manufacturing Index and November preliminary Machine Tool Orders early Tuesday, while the US will release later in the day November PPI.

Ahead of the Asian opening, the pair offers a short-term bullish stance, as technical indicators in the 4 hours chart maintain their upwards lopes, heading higher within positive ground coming straight from oversold levels. The pair is also surpassing a dynamic resistance area, now the immediate support defined by the 100 and 200 SMA, both converging around 113.15. The pair also has several intraday highs and lows in the current 113.20 price zone, which means that the bullish case will be firmer on an advance beyond 113.30, with bears likely giving up, at least temporarily. Bears will take over the pair on a break below the mentioned 100 DMA at 112.20.


Global Markets


Reuters: The pound hovered near 20-month lows on Tuesday, as political turmoil deepened in Britain with a key vote on Brexit being delayed while U.S. shares staged a late rebound in a positive signal for Asian markets. Separately, disappointing data from major economies including China and Japan have fanned worries about global economic activity. The ongoing Sino-U.S. trade battle has also clouded the outlook for world growth. 

All that has put brakes to the rapid momentum in equities, with MSCI’s broadest index of Asia-Pacific shares outside Japan skidding more than 16 percent so far this year. It had surged 33.5 percent in 2017. The index was last off 0.1 percent. Australian shares gained 0.6 percent while Japan’s Nikkei lifted 0.2 percent. Overnight on Wall Street, major indexes bounced modestly from an initial drop due in part to a recovery in Apple shares. The Dow added 0.1 percent, the S&P 500 gained 0.2 percent and the Nasdaq climbed 0.7 percent. 

For the year ahead, BofAML has forecast modest gains in equities and credit, a weaker dollar, widening credit spreads, and a flattening to inverted yield curve - a combination that calls for heightened volatility. Among emerging markets, investors will focus on India where the central bank governor abruptly resigned. In commodities, oil prices echoed the weakness in global stock markets amid worries about a slowdown in demand. 


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