Brexit: Day 3
Sterling has drifted lower again through last night’s Asia session and is a further 2% below its Friday close that saw it close 9% lower on the session. The hope had been that Prime Minister Cameron’s resignation on Friday would end some of the political turmoil as long as a succession plan was seen as in place. With him hanging on until October, and no comment from George Osborne until this morning, the Westminster story is having a profound psychological impact on these markets.
The Labour party bunfight alongside an almost tacit admission from some of the Leave campaign that they are flying without a map is not going to do anything for sterling in the short term. Traders walking into dealing rooms around the world have very little reason to hold on to or purchase additional sterling at the moment.
Bottom pickers will emerge of course and try and catch the falling knife that is the pound but rallies in GBP are set to be sold aggressively. Our initial targets of a 7-10% fall in the value of the pound on Friday proved correct but one day’s moves rarely matter in the grand scheme of things but the funding position of the UK with its twin current account and fiscal deficits are the next pressures to weigh.
We are still looking for another 10% from GBP/USD in the coming months as data confirms the economic slowdown and monetary policy expectations from the Bank of England increase.
Osborne does little to reassure
George Osborne was notably absent from the Sunday political shows this weekend but appeared this morning a little after 7am in an attempt to reassure markets. It seems to have worked with FTSE shares and the pound rallying slightly, possibly on the relief that he will not resign. As Chancellor in the situation that he finds himself he was never going to lean on the lectern and say ‘Yep, we’re totally screwed’ despite what he said in the campaign, as much as he may have wanted to lay out just how much this is going to hurt. Fiscal action may come but at the moment, the best the Chancellor could offer was that “Britain is open for business”.
In the meantime, we must wait for a fiscal response but it is the demand side of the consumption equation that is most being hit at the moment. That means more action from the Bank of England and further pressure on the pound.
Spain elections leave PP without a majority
Political pressures existed in Spain over the weekend as well as the wider EU with their latest general election. The conservative Partido Popular took the most seats but remained short of a majority but this has done little to break the deadlock since the most recent election in December. The Podemos party – a left-wing, anti-EU party – failed to make gains; maybe Spain is not quite ready for a Westminster style nightmare quite yet?
The Day Ahead
USD/CNY has attracted a lot of chatter this morning with CNY falling to its weakest level against the USD since late 2010, after the PBoC weakened its benchmark rate by the biggest margin since a one-off devaluation in August 2015. Risk will remain under pressure in the short term with redemptions from investment funds and trusts the next possible market indicator of fear. Westminster is the centre of the markets world for now.