Brexit headlines have been dominating the European markets, as Germany is already facing technical recession.
Just now, EU Commission President Juncker said in a Twitter statement that the EU and the UK have reached a “fair and balanced agreement” and that he recommends that heads of state endorse this deal. Bund and gilt yields have jumped 3.9 bp and 5.6 bp respectively so far.
Next……..
However as a Guardian journalist has tweeted that, according to an EU official, that even if a deal is agreed now, “ratification by October 31 would be impossible.”
Another source cited to be an EU official told a Telegraph correspondent that:
“Maybe we will have a deal and maybe not. But one thing is clear; if we are to have a deal it will be a legally operational solution preventing a hard border on Island of Ireland, protect good Friday agreement, all Ireland economy and integrity of the Single Market.“
One key sticking point is the issue of Northern Ireland political parties giving consent to the customs proposals, which is a major concern for the EU given the rejection of the proposals by the DUP. One thing seems clear, and that is the EU isn’t budging on its red lines. A delay in Brexit is looking likely.
The UK government is obliged to ask for a 3-month extension, as stipulated in the newly-minted Benn bill, in the event that a deal hasn’t been reached by October 19. The Brexit Secretary, Stephen Barclay, confirmed yesterday that PM Johnson will send a letter to Brussels seeking a three-month extension — i.e. comply with the law — in the event a deal isn’t made in time, marking a step-down from Johnson’s hitherto insistence that the UK will be leaving the EU on October 31 regardless.
If there is a delay, then focus will shift to a general election. If, on the other hand, a deal does materialize, then it would face the hurdle of a parliamentary vote in the UK, which would be a close call, and if rejected, then a Brexit delay will happen.
In the Eurozone meanwhile…….
Downside risks to the economic outlook are mounting and against that background markets are hoping that politicians will finally find a way to move forward.
- Lower oil prices see headline inflation slide again : Final German inflation data for September confirmed the headline rate at just 0.9% y/y, with the breakdown highlighting that base effects from lower oil prices were the main reason behind the deceleration in the headline rate. Final French numbers didn’t hold any surprise, and left the overall Eurozone rate on course to be confirmed at 0.9%.
- German exports continue to decline amid US-Sino trade tensions and Brexit: Exports have been declining on a monthly basis but remain up 0.4% y/y in the first eight months of the year, as the nominal trade surplus is shrinking. It remains too high for Trump’s liking though and the risk for Europe is of course that a truce on the US-Sino trade front will mean additional focus on lingering trade tensions with the EU. UK, on the other hand, has slid down the list of Germany’s most important trade partners to the 7th place, after still being number five last year. German exports and imports to and from the UK dropped in the first seven months of the year. Exports have been declining ever since the Brexit referendum, driven to a large extent by a drop in German exports of cars and car parts, although this may also be related to “Diesel-gate” and other problems in the German automobile sector.
- Germany’s ZEW investor confidence: The expectations reading is back to -22.8 from -22.5, highlighting that a large majority of respondents remains pessimistic about the outlook.
Germany is expected to ditch “black zero” if growth outlook worsens. Germany’s focus on a balanced budget has already been watered down by a new focus on “green investment” to tackle climate change. However, it seems that the Finance Ministry is readying plans to respond to an economic hit.
Officials, however, are still holding that the technical recession that we are facing in Germany right now could be confirmed as a shallow contraction once the Q3 GDP numbers are out.
However, the risk clearly is that this will turn out to be too optimistic and that the slowdown will be longer and more pronounced than currently expected. Against that background, long bond yields are likely to continue to nudge higher, either because fiscal spending will increase as growth weakens, or because the economic outlook will improve if and when Brexit uncertainty and US-Sino trade tensions are resolved.
EURGBP
EURGBP, after a drift of more than 420 pips in the last week, finds some floor at 0.8600 since NY session yesterday, amid a weaker Pound on the news that Northern Ireland’s DUP will not support the latest Brexit plan. The reversal higher looks temporary, as the asset remains well below 5- month Support at 0.8785 (now converted into Resistance) and below all three daily MAs (i.e. 20-, 50- and 200-day SMA) as Bollinger Bands continue to extend southwards. Momentum indicators are negatively configured with RSI at 32 whilst MACD lines have confirmed a bearish cross. These point to heightened selling pressure.
There is a burgeoning drift of five bearish daily candles meaning the Resistance at 0.8715 is a key near term gauge for a potential reversal, while access of the 0.8600 Support level could be a sell zone. A close below 0.8600 opens further decline to 0.8300-0.8450 area.
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Andria Pichidi
Market Analyst
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