September 3, 2019 / 8:00 AM / 19 days ago

Daily Briefing: Sterling plunges as parliament returns

Sterling plunged to its lowest in almost three years early on Tuesday as the UK parliament returns from recess and takes on the government’s Brexit plans, possibly triggering a general election.

A member of the media sets up a TV camera in front of the Houses of the Parliament in London, September 2, 2019. REUTERS/Henry Nicholls

The pound fell below $1.20 as London trading began and dropped to its lowest since the flash crash of October 2016. Ignoring that downward spike, the pound’s decline on Tuesday to as low as $1.1971 would be its lowest since 1985.

Nervousness surrounding UK assets is rising over the twin prospect of a no-deal Brexit on Oct. 31 and a general election either before or shortly after that date.

"I think there’s a group of Conservatives who feel very strongly that now is a time where we have to put the national interest ahead of any threats to us personally or to our careers"

Government sources and press speculation say if UK PM Boris Johnson is defeated on Tuesday in a parliamentary move to prevent his leaving the European Union on Oct. 31 without a deal, he might call a snap election for as soon as Oct 14.

In the meantime, UK courts will hear a case to prevent the PM suspending parliament from next week until the middle of next month.

World markets elsewhere were on tenterhooks amid the U.S.-China trade war and the Brexit drama. Shanghai, Tokyo and Seoul were steady to lower, with Hong Kong stocks underperforming again. China’s offshore yuan recovered after a slide to fresh lows late Monday.

U.S. markets return from holiday later on Tuesday, with Wall Street stock futures still down about 0.7% since last Friday. European stocks were steadier. Euro/dollar continued to weaken below $1.10, reaching its lowest in more than two years at $1.0929.

Speculation the Federal Reserve will cut interest rates by just a quarter point this month is buoying the dollar while markets continued to bet on more aggressive European Central Bank easing. Italian 10-year sovereign bond yields fell below 1% before the Five Star party's vote on joining a new government coalition with the centre-left Democratic Party.

Trade war fears reverberate through developing-market stocks and currencies. MSCI’s broad emerging-market equity index fell 0.7% and currencies fell to near 10-month lows.

China’s onshore yuan weakened for a third straight day, touching its lowest since January 2008 at 7.1371 to the dollar. It recovered in offshore markets after tumbling to a record low on Monday. Currencies elsewhere struggled against a dollar climbing to a 28-month peak.

South Africa’s rand was lower before second-quarter gross domestic product data, expected to show GDP grew at an annual 0.8% rate. Russia’s rouble weakened by 0.1%, reflecting lower crude prices.

But Turkey’s lira gained after inflation data came in lower than expected, rising 0.86% month-on-month (forecast  was 1.3%) and 15.01% year-on-year. Meanwhile, talk of a breakaway movement from The ruling AKP party is gathering pace. The party wants to eject former prime minister Ahmet Davutoglu, a critic of President Tayyip Erdogan and his economic policies, and three other lawmakers.

In European corporate news, shares of the British plumbing products company Ferguson are expected to get a lift from news it will separate its UK operations to focus on its North American business and that Chief Executive John Martin will step down in November this year. Dealers are also expecting pressure on Just Eat after one of its top shareholders said it would vote against a planned merger with Takeaway.com.

French IT company Iliad shares are expected to fall after its first half missed expectations. Nordex shares are up almost 4% in premarket trading after the company won a contract to install wind turbines in Scotland.

Investors will be keeping tabs on Hurricane Dorian, which pounded the Bahamas, killing at least five people, and was heading towards the United States, where more than a million people have been ordered evacuated.

UBS estimated on Monday it could cause insurance industry losses of up to $25 billion. Swiss Re, Lancashire and Beazley are exposed to the U.S. market, according to traders.

Deutsche Boerse may get a boost from news it will be promoted into the euro zone blue-chip index, STOXXe50, as part of a semi-annual reshuffle.

— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —

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