September 6, 2018 / 7:30 AM / 2 months ago

Daily Briefing: Sterling seen rising if Brexit no-deal averted

LONDON (Reuters) - Forecasters expect sterling to float up a good six percent in a year if the threat of a no-deal Brexit can be averted, according to a Reuters survey released today.

Pro and anti Brexit protesters demonstrate outside the Houses of Parliament in London, September 5, 2018

If, on the other hand, Britain leaves the EU without a deal, predictions are of a damaging slide in the pound of up to 15 percent. For the time being, market players are finding as many reasons to buy sterling as they did to sell it a couple of weeks ago.

The currency is getting a boost from a bout of optimism about the chances of an accord, buoyed notably by a series of positive-sounding media reports.

The latest was Bloomberg's story on Wednesday suggesting London and Berlin were ready to accept a fudge on the deal. The German government reacted by saying its position was unchanged, while London pointed out that any accord had at least to be detailed enough to persuade the UK parliament to back it.

There was no explicit knock-down of the report, perhaps because the general gist of it has been true for several months at least. Indeed it was announced last year already that there will not be a detailed agreement on future trade relations before Brexit, with instead a short “political declaration” setting out overall aims. Brussels has for some time been keen to make it easy for Theresa May to sell a deal back home.

The surprise number of the morning so far is on the Swiss economy, which registered no less than 3.4 percent growth on the year in the second quarter compared to expectations of around 2.4 percent. Not only that but first-quarter year-on-year growth was revised up to 2.9 percent from 2.2 percent before.

Less promising news in Germany, where industrial orders fell unexpectedly in July on weak foreign demand. That is the latest sign that factories in Europe's largest economy are feeling the bite of protectionist trade policies.

MARKETS AT 0655 GMT

MSCI’s emerging market equity index fell to within a whisker of their lowest level of the year on Thursday, falling for the seventh straight session to record the joint longest losing streak since 2015.

With two key aggravators of this year’s emerging market shock – U.S. monetary tightening and escalating trade wars – high on the agenda for the remainder of the week, the MSCI index has returned to 'bear market' territory after late August’s mini bounce and is now down 20.5 percent from the January peak.

Shanghai and HK stocks fell again earlier amid tension over the U.S. pledge to impose 25 percent tariffs on $200 billion of Chinese goods now that the public consultation period ends today.

U.S. August employment readings also start today, with the ADP private sector jobs number out later before tomorrow’s broader payrolls report. Although business surveys for the month have given mixed signals, the ISM reading at least showed a sharp acceleration in activity and 10-year U.S. Treasury yields have jumped back above 2.90 percent this week as the Sept 26 Federal Reserve meeting is eyed for the next interest rate rise.

Despite the fresh emerging market equity losses, the dollar’s resurgence against emerging currencies paused overnight as the plunging Argentine peso, Indonesian rupiah and Turkish lira all attempted to find a foothold.

China’s yuan did weaken slightly again, however, and India’s rupee nudged close to yesterday’s new record low. South Africa’s rand, battered this week by unexpected news the country re-entered recession again in the second quarter this year, fell back again early on Thursday toward the year’s lows of 15.70 per dollar.

The prospect of recessions over the coming year across many of the emerging economies worst hit by this year’s financial shocks is increasingly unnerving many equity investors as what started as currency disruption risks morphing into debt rollover problems and sudden stops in financing and business activity.

Russia’s rouble nudged lower for the fourth straight day, meanwhile, as the UK’s naming of Russian government agents as the main suspects behind a chemical attack in England earlier this year raised more concerns about widening international sanctions against Moscow. Russia’s central bank chief Nabiullina speaks in Washington later on Thursday ahead of next week’s monetary policy meeting.

Elsewhere, sterling held on to half of Wednesday’s 1.2 percent rally against the dollar on reports Germany and the UK had reached some compromises to secure a Brexit deal between Britain and the European Union.

Italian government bond yields and debt spreads with Germany continued to fall and its sovereign bonds are heading towards one of its best weeks in years as the anti-austerity government signalled strongly this week its willingness to stay within EU budget rules.

A man walks past a screen at the Indonesia Stock Exchange building in Jakarta, September 6, 2018

After comments from both deputy Prime Ministers Salvini and di Maio to that effect this week, there were reports the project budget deficit outlined for next year would be between 2 and 2.5 percent of GDP – well within the 3 percent EU ceiling.

Another set of disappointing German industrial orders numbers for July kept a lid on a firmer euro/dollar meantime. European stocks are expected to open slightly lower, with U.S. futures down slightly too.

— 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 —

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