The European market (Stoxx-600) is currently trading around 353.12 mid-Thursday, slips by almost -0.60% on renewed Italian budget concerns, some earnings disappointment, and lower USD as both British Pound and Euro soared on revised Brexit deal draft. GBPUSD jumped to a high of 1.2927, almost +1.17%, while EURUSD surged to a high of 1.1433, almost +0.60% from Italian budget worries low of 1.1364 and the US dollar index (DXY) slumped to a low of 96.32, down by almost -0.40%.
As per the report, the UK and the EU have agreed on a revised political declaration draft for future EU-UK ties post Brexit. The UK and the EU are to develop an “ambitious, broad, deep and flexible partnership” that will include everything from extensive trade liberalization to “operational co-operation” between police forces, according to a leaked declaration on future relations that is due to be approved at an EU summit on Sunday.
The UK Prime Minister Theresa May and the EC President Juncker have provisionally agreed on the bulk of a 26-page text that will form the final part of Britain’s exit package from the EU. Although the revised Brexit draft falls short of Theresa May’s Chequers aspirations for “frictionless” trade in goods with the EU after Brexit, its ambitious tone “may” offer May significant help as she attempts to sell (approve) the Brexit deal to her divided cabinet and a warring British Parliament.
As per some leaked details, the revised Brexit draft foresees equivalence for UK banks and the EU, UK to commit to 'deep' customs cooperation to be built on 'single customs territory'. Both the UK and the EU are ‘determined’ to replace the backstop in the future, while the EU is to recognize the UK's independent trade policy. The transition period can be extended for up to ‘one or two years’. The EU, UK will aim to conclude a new agreement on fisheries by July 2020 and will also try to assess equivalence of laws on financial services by then. The EU and the UK to commit to deep customs cooperation to be built on ‘single customs territory’. The EU to recognize the UK’s independent trade policy and both see free trade area, deep regulatory cooperation.
Meanwhile, the EU’s Tusk said that the future relationship deal is "agreed in principle", subject to leaders' endorsement. Tusk tweeted: “I have just sent to EU27 a draft Political Declaration on the Future Relationship between EU and UK. The Commission President has informed me that it has been agreed at negotiators’ level and agreed in principle at the political level, subject to the endorsement of the Leaders”.
The UK government source said “We have made significant progress from the outline political declaration in a number of areas and the PM thinks we are moving towards a place where we have a good deal for the UK. We have made significant progress from the outline political declaration in a number of areas, but issues on Gibraltar by no means resolved, the EU27 still have to agree on it. The PM has been clear throughout she would only agree to what she thinks is the best deal for the UK”.
When asked about Tusk comment that Brexit agreement reached, the UK PM may’s spokesman said he is “not aware the PM has spoken to Tusk either last night or today (Thursday). But no final deal can be agreed without the approval of the EU Council on Sunday. The PM May is currently updating her cabinet on the state of Brexit negotiations by teleconference and will speak soon”.
As per the report, Britain secures no improvements to proposed future trading relations in financial services with EU in the agreed Brexit draft declaration, but EU, UK to also consider technological solutions to prevent hard border on the island of Ireland. As a sweetener for Brexiteers the revised draft helpfully underlines a possible technologically, ‘MaxFac’ solution to the Irish border at some undefined point in the future. As per the UK government source, the wording on Irish backstop shows improvement.
But this political Brexit declaration is going to bolster the concerns of Eurosceptics as it says that where there are disputes over matters of EU law; i.e. goods, the arbitration panel must defer to the rulings of the European Court of Justice (ECJ). The joint committee may well have baby joint committees and if post Brexit transition period is extended, Britain will continue paying to EU budget. The draft declaration says: “Economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors, with ambitious customs arrangements that ...build and improve on the single customs area”.
There are no mentions of Gibraltar or "frictionless" trade in goods in the political declaration, except some bits on fish, level playing field and goods. The EU Commission said: There are ideas on Gibraltar and can confirm issues of fisheries, Gibraltar still need to be resolved before Sunday. Meanwhile, as per Spanish diplomatic sources, “Spain will vote against current Brexit draft proposal due to lack of clarity on Gibraltar. Spain wants it made clear in the Brexit proposal that decisions on Gibraltar must be agreed bilaterally between Spain and Britain”.
The German Chancellor Merkel sounds cautious on Brexit and said: “Will do everything to reach a Brexit agreement as disorderly Brexit is the worst outcome. The US-China trade conflict is already causing uncertainty among our companies”.
Meanwhile, the UK PM Theresa May has finally spoken about the modified Brexit text (political declaration).
Theresa May clarified: “This is the right deal for the UK as this deal delivers on the vote of the referendum. I am confident that I will be able to agree on a deal that delivers for the whole of UK. The UK people want this settled and the deal is within our grasp that includes Gibraltar. I am determined to deliver this deal”.
Elsewhere as per EU sources: “EU27 leaders aim to endorse separate declaration on Sunday along with Brexit package to cover fisheries, environmental standards, and Gibraltar. The EU 27 leaders' draft note - leaves empty space for text on Gibraltar. The EU will monitor UK environment rules; wants reciprocal fishing access, quotas agreed before transition ends”.
GBP/USD
Thus overall, the “new” Brexit text may be the “same old wine in the new bottle” and it will be tough for Theresa May to sell it to her cabinet colleagues, DUP coalition partners, the British Parliament and the British people at “exorbitant prices”. Subsequently, GBP slips from the session high as Brexit uncertainty remains and is currently trading around 1.2866, up by +0.70%.
Pivot: 1.293 Support: 1.283 1.272 1.26595Resistance: 1.298 1.303 1.316 Scenario 1: STRONG ABOVE 1.29300 Scenario 2: WEAK BELOW 1.29250 Comment: NEAR TERM RANGE: 1.26595-1.33000
The UK’ FTSE-100 plunged over -1.30% on higher GBP and is also under stress after subdued guidance from the UK utility Centrica (LON:CNA). The UK’s FTSE-100 is currently trading around 6978.50, plunged by almost -1.03% and so far made a low-high of 6943.75-7036.47 in a day of moderate Brexit volatility, which is a trading opportunity.
Pivot: 7100 Support: 6940 6890 6820Resistance: 7175 7255 7355 Scenario 1: STRONG ABOVE 7100 Scenario 2: WEAK BELOW 7075-7050 Comment: NEAR TERM RANGE 6820-7175
On the never-ending Italian budget drama, EU’s Moscovici said he is convinced that a budget agreement can be reached with Italy because it’s in everyone's interests. But Italy’s PM Conte said Italy is not ready to backtrack on any point in the budget when it comes to defending Italian interests.
Meanwhile, Italy’s deputy PM Di Maio also ruled out any possibility of correction to budget before EU elections and said “Italy is not isolated in Europe and after 2019 EU election, may EU countries will have more drive to change ‘rules of the game’. The EU should not ask us to ‘betray’ Italians, which is something, I will not do. But I see room for dialogue with the EC on budget and it’s also important not to send a message that the EU is asking Italy to make social bloodbath”.
On early Thursday, Stoxx-600 slumped by almost -0.80% on renewed concern about Italian budget drama as Di Maio and Salvini duo (who are in actual charge of Italy) has reportedly said Italy won't "change a comma" on the budget. Italy’s two deputy prime ministers Salvini, Di Maio do not want to negotiate with EU over 2019 budget. Additionally, Salvini said (so far): “Italy will not backtrack on budget law and I will talk to Moscovici, Juncker on budget. Italy doesn't want to fight with anyone and bond yields spread cannot be controlled by government”.
The market is confused about Italian budget war/truce as there are various confusing reports (speculation) going around. Some reports suggest that the Italian European affairs minister Savona is strongly in favor of amending the budget law, while Italy’s agriculture minister denies reports about Savona backing budget changes, said Savona never voiced concerns during cabinet meetings.
As per earlier reports: “Italy ruling Lega party is open to changing the budget law, while coalition partner 5-SM against it. Italy’s Deputy PM Di Maio is ready to negotiate with EU over budget but does not want to lower expenditure to fund key measures. Italy's PM Conte may address the parliament on the budget Thursday and will present an urgent report on the dispute with the EC. Di Maio said to see possible budget modifications in the Parliament”.
Meanwhile, EU's Moscovici said “Future steps in Italy's excessive deficit procedure (EDP) are not yet set, including the pace and trajectory of debt and deficit reduction. But dialogue over Italian budget ‘imperative not optional’, reciprocal respect necessary, the irony is out of place. The composition of the Italian budget is inadequate to tackle the country's low productivity problem, better to spend on investments (government capex)”.
Overall, it now seems that being a slave to “spreads”, the Italian government will bound to negotiate and as the EU can’t afford another costly exit in the form of “Italexit”, will bound to accept some budget rule compromises for the whole EU, not just for Italy as lack of sufficient financial independence, fiscal stimulus and over austerity may be one of the prime reasons behind EU’s current rate of nearly double-digit unemployment rate and growing Eurosceptics sentiment across the Eurozone and Brexit.
Italy’s FTSE MIB-40 is currently trading around 18600, slumped by almost -0.70% and so far made a low and high of 18513.50-18696.50 amid all these Italian budget squabblings.
Pivot: 18800 Support: 18700 18500 18350Resistance: 18950 19100 19250 Scenario 1: STRONG ABOVE 18800 Scenario 2: WEAK BELOW 18780-18750 Comment: NEAR TERM RANGE: 18350-19250
In commodities, Gold (Dec-18) is currently trading around 1228.90, edged up by almost +0.07% in a holiday-thinned market on lower US dollar index and increasing EU political risk coupled with a slump in the stock market (risk-aversion move). So far Gold gained almost 3% in October and November (till date) on risk-aversion and -1.45% gain in the USD.
Pivot: 1250 Support: 1215 1200 1180 Resistance: 1275 1295 1305 Scenario 1: STRONG ABOVE 1250 Scenario 2: WEAK BELOW 1240-1230 Comment: NEAR TERM RANGE 1180-1245