LCG: Pound jumps on rising hope of no-deal Brexit as BoJo gets defeated on Tuesday vote, weak US data revives dovish Fed expectations – By Ipek Ozkardeskaya

 

The Pound sterling was the best performer against the US dollar in Asia.

The pound bounced past 1.2100 against the greenback, as British MPs took control of the parliament, voting 328 to 301 on Tuesday to block Boris Johnson from leading the UK out of the European Union without a deal in hand.

Johnson’s defeat gave a breather to the pound markets, although the game is not over yet for the GBP bears. Boris Johnson could announce a snap election by October 14 to seek support from British voters to get the Brexit done, with or without a deal.

Recent polls show that Tories’ popularity has well deteriorated following three years of endless talks with the EU and fruitless negotiations to agree on a suitable Brexit deal for both parties. Provided that the confusion among British policymakers has helped the EU strengthen its hand in the Brexit negotiations, Johnson’s efforts to reverse this trend is somewhat understandable. But muting the parliament to achieve this goal was disturbing enough to convince 21 Conservative ‘rebels’ to move their support to the Labour Party on Tuesday’s vote.

It is worth keeping in mind that a snap election is a risky bet for Boris Johnson. If he loses, he will be the shortest serving PM in the country’s history, and more importantly, the Labour Party would opt for a second Brexit referendum to make sure this is what Brits really, really want.

An election as early as next month could give another shake to the sterling, but even a tiny hope of preventing Johnson from crashing out of the EU without a deal could help the currency consolidating support near the 1.20 level against the US dollar and eventually recovering a part of the recent weakness. Cable fell over 10% since March, hence a gentle recovery toward the 1.2295, the minor 23.6% retracement on March – August drop, is possible. But traders will likely remain seller on tops on looming and mounting political tensions in the UK. A bumpy trading is perhaps what investors will be dealing with for at least another quarter.

Due today, the UK services PMI could hint at a slower expansion in August, as the composite PMI should confirm softer growth in all-sector activity amid construction and manufacturing PMIs contracted faster than analysts’ forecasts. A soft PMI read could temporarily cool down the recovery in pound, but the political developments will remain the major driver of market prices in Britain in the coming days and weeks.

FTSE traders preferred waiting on the sidelines as yesterday’s political uncertainties outweighed the excitement of a cheaper pound. But the Britain’s blue-chip index is set for a positive open in London. Investors eye an advance toward the 7300p mark on improved sentiment after Tuesday’s no-go vote for Johnson’s no-deal Brexit.



Asian equity indices traded mixed on Wednesday

Australian composite PMI hinted at a faster contraction in economic activity in August, as the 0.5% GDP growth in the second quarter came in line with analyst expectations. As such, the Australian growth slowed to 1.4% year-on-year from 1.8% printed earlier, as the slowing Chinese economy took its toll on the activity. The ASX 200 index fell 0.61% in Sydney. Australia’s 10-year government yield remained below 0.94%, near all-time lows, as investors continued pricing in two more interest rate cuts before March 2020 to give support to the economy, if the US – China trade tensions don’t improve.

Speaking of the trade war, US President Donald Trump said that negotiations with China are going well, although the Chinese officials may have a different opinion on the matter after $110 billion worth of Chinese exports toward the US became subject to 15% tariff on September 1st, despite Beijing’s request to delay action. Trump said that the deal would get ‘much tougher’ if he wins a second mandate at 2020 presidential election.

Shanghai’s Composite (+0.28%) recorded timid gains, while Hang Seng index (+1.32%) outperformed. All sectors traded in the green. Data showed that the sharp decline in Hong Kong shares due to anti-China protests haven’t refrained Chinese investors back from investing in HK stocks. Capital continues pouring in the HK markets from mainland China on the back of cheapened valuations.  

US 10-year yield fell below 1.43%, as weak manufacturing data revived Fed doves

The US dollar retreated against most G10 currencies, except the yen, as the US 10-year yield tumbled below 1.43% on Tuesday after the ISM data pointed at an unexpected contraction in the US manufacturing activity in August.

Meanwhile, the Federal Reserve (Fed) presidents sent mixed messages regarding the possibility of an interest rate cut at the FOMC’s September meeting. Boston Fed’s Rosengren said that the US economy is ‘relatively strong’ despite rising risks, leaving him undecided about a cut at this month’s meeting. St Louis Fed’s Bullard, on the other hand, said that the Fed should refrain from disappointing the market, meaning that the US should go ahead with at least 25-basis-point cut in two weeks to keep up with the dovish market expectations. And in fact, the Fed is cornered by the doves; staying pat at this month’s meeting would be a risky bet and could send the equity and sovereign bond markets tumbling.

When it comes to further stimulus, the European Central Bank (ECB) is likely the next to join the doves’ camp in September. The euro consolidates below the 1.10 against the US dollar on rising bets that the ECB will cut the deposit rate by at least 10 basis points, if not more, to cope with the deteriorating worldwide growth and slowing demand due to a broadening global trade war and looming Brexit uncertainties. According to the activity in Euro-zone sovereign bonds market, the probability of a 20-basis-point cut is being priced in at 60%, as the German 10-year yield consolidates near the historical dip below the -0.70% mark.

Elsewhere, the Bank of Canada (BoC) is expected to maintain its policy rate unchanged at 1.75%.

Opening calls

FTSE is expected to open 30 points higher at 7298                           

DAX is expected to open 67 points lower at 11978           

Contact: Ipek Ozkardeskaya, Senior Market Analyst

Twitter: @IpekOzkardeskay

Email: ipek.ozkardeskaya@lcg.com

Skype: Ipek.ozkardeskaya

 

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Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.