November 16, 2018 / 8:50 AM / 25 days ago

Daily Briefing: Wounded May fights on despite "flight of the Brexiteers"

LONDON (Reuters) - Et tu Gove? Britain's pro-Brexit environment minister, Michael Gove, is apparently umming and ahhing about whether to stay in government, having turned down Prime Minister Theresa May's offer of the Brexit ministry.

FILE PHOTO: Secretary of State for Environment, Food and Rural Affairs Michael Gove arrives at 10 Downing Street, November 12, 2018

That job became available after Thursday's "flight of the Brexiteers", when the incumbent and another senior cabinet colleague quit along with a raft of junior ministers.

Gove, the highest profile Brexiteer left in cabinet, apparently wants to renegotiate Britain's withdrawal agreement with the European Union, something May will not countenance. His departure could increase the May's chances of facing a leadership contest within the ruling Conservative Party.

Even if May faces down her party critics and survives as leader, as things stand only a pathological optimist would put money on her EU withdrawal agreement winning a vote in parliament.

Indeed, there appears to be no majority in the House of Commons for anything right now, including crashing out of the EU on March 29, 2019 without a deal. The opposition Labour Party says it will vote against May’s deal and wants an early election.

But fixed-term parliaments mean there’s no easy way to engineer that. In any case, the Conservatives and the small Northern Irish party that gives May a working majority in parliament are unlikely to want to risk an early general election in such chaotic circumstances.

Hence talk is building of a second referendum as the only way to break the logjam. Which is why May is saying: it’s my deal or no Brexit.

MARKETS AT 07:55 GMT

Sterling seems to have stabilised after its biggest one-day drop in two years, but the reprieve is likely to be temporary.

It seems to be open war now on UK PM Theresa May with ministerial resignations yesterday and this morning the Telegraph reporting that the DUP will pull its support from the government unless May goes.

Gilt yields saw their biggest nosedive in two years and all the uncertainty should keep sterling and UK companies exposed to the local economy - from home builders to banks such as RBS – on the ropes.

In the words of one analyst from the Commonwealth Bank of Australia: “If and when a vote on the withdrawal agreement occurs is uncertain. Whether the withdrawal bill is passed by both houses of Parliament is uncertain. Whether the Prime Minister resigns or is challenged for the leadership is uncertain. And, whether there is a second referendum and/or an election is uncertain.”

However, anything that suggests another referendum - and the prospect of a no-Brexit - could allow a bounce in the currency, which is why traders may be wary of pushing it much further in the same direction.

The FTSE is set to open higher today — interestingly, yesterday it ditched its long-standing inverse correlation with sterling and closed flat while the domestically oriented FT250 fell almost 2 percent and the Dublin stock market was a victim, too, losing almost 4 percent. Against the euro, the pound is set for its biggest weekly loss since September 2017.

But let's not forget that news on other fronts isn’t great either. Fresh scares for the tech sector as Nasdaq-listed chip designer Nvidia slumped 17 percent and took a toll after hours on other chip firms as well as Asian tech in Taiwan, China and Japan.  World shares are down 1.5 percent so far this week, having now fallen six weeks of the past eight.  

Chinese mainland shares are half a percent higher, however, on hopes of relief on the US trade front -- there have been reports the United States might pause on further China tariffs -- though those expectations have been somewhat dashed by a Reuters report that there is unlikely to be a breakthrough in talks between Presidents Donald Trump and Xi Jinping later this month.  

On the U.S. earnings front last night, there was some disappointment. JCPenny shares slumped 9 percent at one point and the VIX volatility gauge rose to two-week highs.

Elsewhere on the currencies front, interesting comments from Fed Chair Jerome Powell yesterday suggesting the Fed is watching downside global risks. There were similar noises from a couple of other Fed officials.

Now, it’s unlikely the bank will hold off raising rates in December --  there seems little reason for it to do so -- but next year is another question altogether. The view from our investment outlook summit this past week has been that the Fed will pause sometime in 2019, its hand forced by slower growth at home and overseas. 

The dollar is flat against the currency basket and down 0.3 percent against the yen, which has caught a safety bid since yesterday. But on a weekly basis its four-week streak of gains seems to have paused.  

The yuan saw some short positions getting cleared out on signs the United States could offer some trade concessions, but that has stalled after Reuters quoted senior U.S. officials denying it. The market is likely to trade ranges ahead of G-20.

Ten-year Treasury yields fell to two-week lows yesterday as the Brexit noise spooked markets. But gilt price gains were even bigger, taking US 10-year yield premia over British yields to the highest since 1984.  German Bund yields also fell to two-week lows. Quiet on the data front with only U.S. manufacturing production and final euro inflation for October. 

In Europe, futures for the main euro zone stock indices and Britain’s FTSE 100 were higher, suggesting a relief rally could sweep the region after Brexit nerves drove risk-off moves in the previous session.

After a week that saw a sharp oil sell-off, Italy squaring up for a budget showdown with the EU, and the longevity of the UK government questioned, the pan-European STOXX 600 was set for a weekly loss, after two straight weeks of gains.

Earnings season is drawing to a close, but Vivendi could be a mover after its results late Thursday. The French media group announced better-than-expected third-quarter sales and said it is lining up banks for a possible sale of part of its Universal Music Group division – a spin-off that analysts say would be highly lucrative for the company.  The stock was indicated up 2 to 3 percent, according to traders.

The highly valued tech sector was also in focus after U.S. chipmaker Nvidia disappointed, warning of slower holiday sales because of a drop in enthusiasm for cryptocurrency mining as crypto prices tank. The stock fell nearly 17 percent in late trading, and European chipmaker shares could also be bruised by the latest in a string of negative news from the chip sector.

Austrian chipmaker AMS, which was Europe’s best-performing stock in 2017 (up a cool 208 percent) is down 69 percent this year. M&A could also be a mover after sources said ABB was in talks with three Asian suitors for the sale of its Power Grids division. The Swiss stock was seen opening up 1.2 percent.

On the Brexit front, businesses were raising the alarm over Brexit uncertainty. German carmaker BMW said it was continuing to prepare for a no-deal Brexit and British aero-engine maker Rolls-Royce also said it would plough on with contingency plans.

Outside the large-cap space, Rovio Entertainment, the Finnish maker of the "Angry Birds" mobile game series, said competition and high marketing costs would cause sales to fall for the full year.  Danish industrial components firm NKT could sink up to 15 percent after a profit warning and the departure of its chief executive.

In emerging markets, stocks rose 0.2 percent, putting the broader index on track for a 0.7 percent gain on the week. In Asia, China mainland stocks are up 0.5 percent, South Korea added 0.2 percent and the Philippines and India rose to near one-month highs, but a 2.3 percent tumble in Taiwan Semiconductor as chipmakers clocked hefty losses dragged Taiwan’s broader index lower.  

Across EM currency markets, Turkey’s lira chalked up some of the biggest losses, weakening 0.4 percent after industrial production data showed a 2.7 percent fall year-on-year in September, providing further evidence that the country is poised for a recession.

Prime Minister Theresa May, together with her Chief of Staff Gavin Barwell, leaves the LBC radio studios in central London, November 16, 2018

Mexico’s peso nudged 0.1 percent lower after the central bank raised its benchmark rate as expected on Thursday by 25 bps to keep a lid on inflation. Policy makers delivered a stark warning to incoming President Andres Manuel Lopez-Obrador that his policies risk fanning price pressures. The currency is on track for a seventh straight week of losses.

Currencies elsewhere were steady to slightly softer against a tepid dollar. A Jamaica central bank policy decision iss due later in the day.

— A look at the day ahead from EMEA Head of Desk Jon Boyle and EMEA markets editor Sujata Rao. The views expressed are their own —

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