The European market (Stoxx-600) closed around 340.46 Tuesday, slips on poor German IFO data, a plunge in oil (negative for energies) and higher EUR/local currency, negative for the export-heavy stocks. European stocks gave up most of their earlier intraday gains after German Dec IFO business climate index dropped more than expected to a 2-year low. Also, weakness in energy stocks and commodity producer has dragged the overall market as oil plunged on hedge fund liquidation and on the concern of higher US and Russian outputs, while copper slumped on muted global demand concerns.
Europe initially followed Asia lower but recovered most of its losses as the session progressed as the US future shows some momentum on hopes of a dovish hike by Fed on Wednesday. But a higher EUR/local currency as a result of broad US dollar weakness also dragged the European market coupled with the never-ending Italian budget and Brexit “games of chickens”.
On Tuesday, Germany’s DAX-30 edged down -0.29% to close around 10740.89 (-31.31) after making a session low-high of 10714.97-10841.42. Germany was dragged by higher EUR (export savvy market), healthcare/pharma, utilities, and techs, while supported by industrials (hopes of US-China trade truce), retailers (bargain hunting after Monday’s big slump) and transportation/logistics. Germany was also undercut by a subdued IFO business confidence data.
Italy’s FTSE MIB-40 edged down -0.26% to close around 18644.85 after making a session low-high of 18555.23-18786.54 amid ongoing Italian budget saga and the lingering budget standoff between Italy and the EC as the dialogue (games of chickens) continue between them.
As per a report, Italy’s populist coalition government has agreed on numbers and contents of 2019 revised budget. In Italy, leaders of the coalition government looked optimistic that they would eventually avoid disciplinary actions by the EU over its 2019 budget. The leader of the League Salvini said, after meeting with 5-Star Movement head Di Maio and Prime Minister Conte, “We have found an agreement on further fiscal reductions that probably will be appreciated by the EU.”
Salvini’s spokeswoman also said there is total agreement between Conte, Salvini and Di Maio on the numbers and contents of the proposal to send to Brussels, regarding 2019 budget plan. And she denied there were tensions within the coalition government and rumors that Prime Minister Conte had threatened to quit. Separately, Di Maio also said the talks with the commission will allow Italy to avoid an infraction procedure.
On early Tuesday, as per a report, the EC/EU is still unconvinced on Italy’s revised budget. Italy asked to save EUR 2.5-3B more before getting the EC approval on the 2019 budget. However, having cut deficit target from 2.40% to 2.04% of GDP, Italian Economy Minister Giovanni Tria said both Deputy Prime Ministers Salvini and Di Maio opposed further cuts. Salvini said that he is optimistic that a budget deal will be struck with the EC and the budget will be approved by the Italian Parliament by 31st Dec. Salvini was also hopeful that Brussels doesn’t drag out budget decision.
On the other side, the European Commissioner for Economic and Financial Affairs Moscovici said today that he’s “been working hard, almost day and night … so that Italy will not be sanctioned either. We’re working non-stop as part of a dialogue so that Italy can carry out the policies it wants while respecting the rules and ensuring that Italy does not face sanctions over deficit goal reach”.
Finally, after the EU market hours on Tuesday, Italian government sources said the EC has accepted its 2019 DBP with the budget deficit of 2.04%. But Italy’s PMO said they need to wait for all procedures to compete and Italy has received only verbal assurances from the EC over this long-awaited and hard-fought budget deal.
France 40
France’s CAC-40 plunged by -0.95% to close around 4754.08 (-45.78), almost at the session low; it made a high of 4804.98. France was dragged by oil & gas, industrials, techs, banks & financials.
Pivot: 4815 Support: 4720 4650 4595Resistance: 4850 4925 4975 Scenario 1: STRONG ABOVE 4815 AND SUSTAINING ABOVE 4850-4975, CAC-40 MAY FURTHER RALLY TO 5150/5200/5230/5295-5325 IN THE NEAR TERM Scenario 2: WEAK BELOW 4795 AND SUSTAINING BELOW 4720-4595, CAC-40 MAY FURTHER FALL TO 4520/4470/4400/4330 IN THE NEAR TERM Comment: SHORT TERM RANGE:4595/4720-4925/5200
UK 100
The UK’s FTSE-100 tumbled -1.06% to close around 6701.59 (-71.65), almost at the session low after making high of 6773.24. The FTSE-100 was dragged by energies (lower oil) and subdued global cues amid an economic slowdown worries, while mid-caps FTSE-250 gained on small bounce backs from bitten down retailers on Monday amid ASOS (LON:ASOS) plunge (bargain hunting). On Tuesday, ASOS initially recovered on analyst’ rating upgrade, but later closed in red again.
Shell (LON:RDSa) plunged after reports of M&A, in which Shell may buy out Texas-based Endeavor Energy for around $8B. Oilfield service provider Petrofac (LON:PFC) jumped on deleveraging news after announcing B/S debt cut more than expected by the market. Energy utility service provider National Grid (LON:NG) plunged after Britain's energy regulator proposed further cuts to the cost of capital for networks; other energy utility service providers such as SSE (LON:SSE) and Centrica (LON:CNA) followed National Grid.
Indivior soared after confirming its 2018 guidance as projected earlier and announced plans to launch a cheaper version of its blockbuster opioid addiction treatment, Suboxone, as it seeks to win back market share lost to copycat versions of the drug to India’s DRL.
Home builders jumped on soft Brexit hopes after the British PM Theresa May announced that she will bring back the Brexit deal again to the UK Parliament in late January, although before that she may face a symbolic no-confidence motion in the Parliament moved by the main opposition Labor Party leader Corbyn.
On Tuesday, GBPUSD closed around 1.2654, surged by almost +0.21% on broad weakness in the US dollar on the concern of a dovish hike by Fed coupled with some soft Brexit optimism after the British PM Theresa May announced that she will bring back the Brexit deal again to the UK Parliament in late January, although before that she may face a symbolic no-confidence motion in the Parliament moved by the main opposition Labor Party leader Corbyn.
Overall, it now seems that Theresa May is pressurizing the EU to modify the backstop issue into a time-bound (1-year) legally binding option or face a no-deal hard Brexit. The EU is not open to modify the backstop or renegotiate the Brexit deal at all, but at the same time also not favoring a no-deal hard Brexit, because Germany’s huge exports to the UK will also suffer in that scenario apart from a negative hardball political image. The EU is trying its best for a no-Brexit with some compromises as soft Brexit and cherry picking deal for the UK could cause a similar domino effect in other Eurozone states.
And at the same time, Theresa May is also pressurizing the UK Parliament (rivals MPs, who are opposing her Brexit deal) either to accept the present Brexit deal (with or without backstop modification) or face a no-deal hard Brexit or no-Brexit at all. Despite so much Brexit and anti-EU/Theresa May rhetorics, no UK MPs/politicians are willing to take the responsibility of the PM post and also a hard Brexit or no-Brexit at this critical juncture.
But the fact is under the present Brexit deal (backstops of backstops), the UK may remain as a “colonial state” within the so-called EU customs union and will be in the name of Brexit only. Thus it will be invariably rejected by the UK Parliament and the ultimate resolution would be no-Brexit/revocation/extension of the Article-50 as time is also running out. Theresa May and the EU knows that the present UK public mood is for a clean Brexit even without a deal. So, they will try to buy more time for a change in public perception amid a hard Brexit fear-mongering.
As per reports, the UK is to start no-deal Brexit preparation in full. The UK Prime Minister Theresa May’s spokesman said Tuesday that the Cabinet agreed that the government should start no-deal Brexit preparation in full. He noted “we have now reached the point where we need to ramp up these preparations and we will now set in motion the remaining elements of our no-deal plans. Additionally, Cabinet also agreed to recommend businesses now also ensure they are similarly prepared, enacting their own no-deal plans as they judge necessary”.
On Monday, the UK Prime Minister Theresa May told the UK parliament that her Brexit agreement is not everyone’s perfect deal but a compromise. But she warned that if the Parliament let the perfect be the enemy of the good then the UK risk leaving the EU with no deal. And she emphasized that avoiding no deal is only possible if the UK can reach an agreement or if the UK abandon Brexit entirely.
Theresa May also reiterated that the EU had offered further clarifications on the Irish backstop and she’s seeking further political and legal assurances. On the timing of the vote, May said the debate on the Brexit deal with resume in the week beginning Monday, January 7 and the vote will be held in the following week, that is, the week beginning January 14.
Meanwhile, the opposition Labor leader Corbyn lodged a (symbolic) motion of no-confidence in Theresa May for delaying the Brexit deal vote as “this is unacceptable in any way whatsoever”. Corbyn also criticized May as the architect of a constitutional crisis, “leading the most shambolic and chaotic government in modern British history”. But the results of such vote would be non-binding, even if it takes place.
On early Wednesday, as the never-ending Brexit soap-opera continues, there was another report that Theresa May is to allow Brexit alternative votes for MP's. The report suggested that Theresa May is in favor of giving MP's a vote on a range of alternatives to her plans when the Brexit deal is debated; previously, she was against this idea.
At present Theresa May has planned to have a 'meaningful vote' on the third week of January (21st). The growing thinking for Theresa May is that she is looking at facing another defeat. To some MP's, this is a preferable outcome since it will simply mean that the UK will leave without a deal. That is just what some hard Brexiteers want, so a passive hard Brexit by default will suit them just perfectly.
There is not enough MP's willing to support May's Brexit deal under the current format, so Britain is heading towards a no-deal hard Brexit. Hence, why Theresa May is planning to allow MP's to vote for other alternatives. The idea behind it is that MP's will see that her plan is the only really viable alternative to avoiding a no-deal hard Brexit, a last and least option for any British MP/Politician to avoid post-Brexit chaos.
As per reports, there is an appetite for different ideas around, even within May's own cabinet, including the following- A Norway-style Brexit which keeps the UK closely tied with the EU; a 2nd Brexit referendum and a managed no-deal hard Brexit (the EU is against it) or no-Brexit.
GBP is now clearly a victim of UK/EU politics and not economics. But the market will also closely watch the deluge of UK economic data later in the day and BOE/Carney statement on Thursday.