July 29, 2019 / 8:36 AM / 20 days ago

Daily Briefing: No-deal talk drags sterling to new lows

LONDON (Reuters) - The penny is dropping in financial markets about no-deal — and the pound is falling.

British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

Senior ministers this weekend said they were working on the assumption that the European Union would not renegotiate a Brexit deal and therefore were ramping up preparations for a no-deal exit on Oct. 31.

Of course, such talk may be part of an effort to scare the EU back to the negotiating table, and there is still also the possibility that parliament will find a way of blocking such an outcome.

But while most analysts still peg the likelihood of a no-deal at under 50 percent, investors are increasingly hedging their bets, with sterling now hitting its weakest level since 2017.

This comes as a CBI report suggests that planning on both sides for such an eventuality is inadequate -- particularly so on the EU side.

Meanwhile, UK PM Boris Johnson, buoyed by a bounce in Conservative Party ratings, heads to Scotland today to convince the Remain-voting country its interests will be best served by staying in the United Kingdom -- by no means a given, with the prospect of a hard Brexit adding fresh momentum to the independence drive of the Scottish National Party.

There are serious concerns about the health of Russian opposition leader Alexei Navalny, who was hospitalised on Sunday after suffering what was described as signs of an acute allergic reaction but which one doctor said could may have been the result of poison.

Navalny, 43, was rushed to hospital from jail where he is serving a 30-day sentence for violating tough protest laws, a day after police in Moscow detained more than 1,000 people for the illegal demonstration he called for.

The European Central Bank’s increasingly overt recognition that more stimulus will be required, including a new “QE2” package of asset buys, will pique interest in a German constitutional court hearing today in a case brought by eurosceptics against the ECB’s bond-buying programme.

It comes after the judges said there was good reason to think the plan exceeded the ECB’s mandate and violated a ban on it funding governments, an argument that was rejected in December by the Court of Justice of the European Union.

MARKETS AT 0655 GMT

With the U.S. Federal Reserve and Bank of England meetings dominating the week ahead for world markets, sterling was the early currency mover first thing Monday.

It fell to 27-month lows of $1.2359 on rising concerns about a no-deal Brexit as new PM Johnson and his reshaped cabinet ratchet up no-deal planning and relations with Ireland and the rest of the European Union deteriorated.

Euro/sterling also rose back above 0.90. The Bank of England meeting follows the expected quarter-point Fed rate cut on Wednesday night and there is some speculation that the BoE may soften its relatively hawkish stance this year to reflect greater likelihood of Britain’s exit from the EU without agreement.

The dollar was generally stronger after Friday’s above-forecast growth in U.S. second-quarter GDP emboldened those who think the Fed is shaping up for just one or two small interest rate cuts rather than the 100-basis-point rate-cutting cycle that markets have priced in for the next 12 months.

The dollar also got a boost after White House economic adviser Lawrence Kudlow on Friday said the administration had ruled out any currency intervention to cap the dollar, despite President Trump’s complaints about competitive devaluations overseas.

Euro/dollar slipped slightly first thing, although it held above the two-year low of $1.11 that it tested late last week.

The combination of the upcoming rate cut, decent GDP readout and some better-than-forecast tech earnings last week saw Wall Street reach record highs on Friday, with the S&P 500 closing up 0.73%.

Ten-year Treasury yields remained subdued, about 2.05%. Adding to the upbeat Wall Street mood was the resumption this week of U.S.-China trade talks in Shanghai.

The trade talks failed to lift Asian markets, with Shanghai and Tokyo ending slightly in the red. Hong Kong lost more than 1% amid ongoing street protests in the city through the weekend.

South Korea’s Kospi lost almost 2% amid a stronger dollar and a near 2% drop in Samsung.

European stocks opened slightly in the red, too.

In European corporate news, M&A is making a big splash this morning with some multi-billion dollar deals breaking over the weekend: LSE Group is in talks to buy financial data firm Refinitiv from Blackstone in a $27 billion deal, Takeaway.com is chasing British rival Just Eat with a potential 9 billion-pound ($11 billion) offer.

LSE shares were up 11% to record highs first thing, with Just Eat shares jumping as much as 21%.

Dealers see Delivery Hero rising 5%.

In the latest activist investor push on European companies, Nelson Peltz’s Trian Fund urged Ferguson to sell its UK business. Shares were seen 1% higher.

The world's second-largest brewer, Heineken, reported lower-than-expected first-half profits were hit by rising input costs. Traders see the shares opening 3% to 5% lower.

Ryanair shares are likely to rise 2% on its first-quarter profit beat, even though the low-cost airline warned fares would decline 6% in the summer season because of overcapacity in Germany and Brexit fears in the UK. Pharma in focus: Swiss drugmaker Novartis is seen 2% lower after its Paragon study in heart failure patients with preserved ejection fraction failed; Traders call Sanofi's second-quarter results "mixed".

Reports of Pfizer’s interest in combining its off-patent drugs business with Mylan could help generic drugmakers.

A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own. 

Editing by Larry King

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