July 31, 2018 / 7:30 AM / 3 months ago

Daily Briefing: Brexit - no deal, no option

LONDON (Reuters) - The possibility of Britain crashing out of the EU in eight months’ time without any deal on a future relationship has become the latest focal point of the Brexit debate.

FILE PHOTO: Britain's Secretary of State for Exiting the European Union, Dominic Raab, holds documents as he poses with European Union's chief Brexit negotiator, Michel Barnier, ahead of a meeting in Brussels, July 19, 2018

Presenting already weak output figures for the first half of this year, the head of the UK's automobile industry grouping warned overnight that a "no deal" Brexit was not an option for a sector that relies so heavily on just-in-time inventories and cross-border supply chains.

On a trip to Paris, British Foreign Minister Jeremy Hunt will wield the risk of "no deal" today to try and persuade his French counterparts to back Britain's latest Brexit proposal: the idea being that such an outcome would be as damaging (the verbatim quote is "challenging") to the EU as it would be to the UK.

Finally the FT reports that Theresa May is warning her party allies that the Labour opposition could use an obscure parliamentary procedure to stop Britain leaving the EU without a deal.

The tacit message to them is: “Make sure you back my Brexit compromise when you return to parliament in a few weeks’ time.” As some, particularly on the hard Brexit side of the debate have pointed out, this is quite a change from May’s old mantra that no deal would be better than a bad deal.

MARKETS AT 0655 GMT

Japan’s yen and government bond yields have retreated after the Bank of Japan said it would keep interest rates low, in turn precipitating a yield drop across euro zone bond markets and Treasuries overnight as fears of imminent monetary tightening from another G4 central bank eased somewhat.

Japanese 10-year yields had risen on Monday to 1-1/2 year highs on expectations the BOJ would resort to some kind of tweak, either in language or on its equity purchase operations, but JGB yields are some 3 bps lower today and the Nikkei has risen a bit.

The attention now shifts to a U.S. Federal Reserve policy decision on Wednesday and an expected interest rate rise from the Bank of England on Thursday.

For equities at large, concerns about the tech sector continue to mount, with the latest falls rekindling memories of the dot.com bubble burst. Worries about the FAANG stocks that have led the whole U.S. bull market over the past two years - Facebook, Apple, Amazon, Netflix and Google parent Alphabet - have been inflamed by disappointing earnings for Facebook and Twitter.

Twitter’s stock price is down almost 30 percent in just three trading days. The tech-heavy Nasdaq fell for a third day in a row on Monday with shares in Netflix and Facebook falling 4 percent.

Apple results tonight will be crucial for the sector which has been the most crowded trade for months but is showing signs of deflating. On the other hand there was good news for industrials, with Caterpillar posting strong Q2 numbers and raising its full year outlook. And for all the tech jitters, MSCI world shares are set for their best month since January.

The dollar meanwhile is set for its first monthly loss after three months of gains, and investors will be watching for Fed language at the end of its meeting to see if two further rate hikes can be cemented in. The latest bout of losses is down to yen gains on the back of the BOJ but many reckon the greenback rally has a little further to go.

The euro added to Monday’s gains after coming under pressure last week when the ECB reaffirmed its pledge to keep rates unchanged through summer, though Spanish and German inflation data on Monday supported the bank’s approach of winding down QE by year-end.

A raft of euro zone data is due today, including flash euro zone inflation and preliminary GDP/inflation in several countries. In the UK, sterling has settled into a tight range before Thursday’s BoE meeting.

— 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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