January 30, 2019 / 8:40 AM / 8 months ago

Daily Briefing: Brexit melodrama - the longest-running show

LONDON (Reuters) - So what do the events in the UK House of Parliament last night actually mean for Brexit? By sending PM Theresa May back to Brussels to demand things that she has no hope of getting, it makes a chaotic no-deal exit all the more likely.

Pro-Brexit demonstrators protest outside the Houses of Parliament, January 29, 2019

That is what simple logic dictates, and of course that still might happen - one of the reasons why sterling lurched lower last night. But this is better seen through the more theatrical perspective of a slightly corny melodrama, where the principle players do and say one thing but secretly hope another will happen.

May's last-minute decision before the debate to back an amendment urging her to re-negotiate the Irish backstop was vital in helping it pass. Yet she presumably knows full well that the EU will not just relent and give her the "significant and legally binding change to the withdrawal agreement" she now says she wants.

Even the true-believer hard Brexiteers know that too - which is why they stress they will not automatically support anything she manages to bring back from Brussels. So all this simply gives May another couple of weeks to apply pressure on lawmakers of all persuasions to give in and back her original plan.

Even with the threat of no-deal looming, that is still an uphill struggle - remember she lost the first January 15 vote on it by a massive 432-202 margin.

The scene is now set for a “high noon” moment with a fresh vote on February 13. This will also be the moment when middle-of-the-road lawmakers must finally decide whether to come stage-centre and force a delay to Brexit.

MARKETS AT 0755 GMT

Sterling’s retreat on the latest Brexit twist and Apple’s post-bell surge on its earnings relief providing conflicting influences for world markets on Wednesday as the Federal Reserve’s latest policy decision is awaited tonight and Sino-U.S. trade talks kick off in Washington.

Apple’s results came after Wall St ended slightly in the red, but the tech giant’s stock rose almost 6 percent after hours as positive news on its earnings from iPhone services offset its China-related revenue warning earlier this month.

S&P futures were little changed first thing Wednesday, with Microsoft and Facebook due to report later in the day. Asia stocks were mixed, with Shanghai and Tokyo down more than 0.5 percent but HK  and Seoul higher. European stocks were expected to open flat amid a torrent of earnings on this side of the Atlantic too.

Sterling found its feet this morning after dropping about 0.7 percent against the dollar and euro on Tuesday evening following a series of UK parliamentary votes on what the government should do next on Brexit.

The two successful amendments gave UK PM Theresa May backing to go back to Brussels and try and change sections of the EU withdrawal agreement surrounding the Irish border backstop arrangements, but also showed there was a majority of lawmakers against a ‘no deal’ Brexit.

However, with EU leaders already saying there is no prospect of renegotiating the deal even as May sets out on talks with them over the next week and with the clock ticking towards the March 29 deadline, investment strategists have nudged up the chances of a ‘worst case’ scenario for the pound involving a chaotic crash out of the union without a deal.

Goldman Sachs increased its guess on the probability of ‘no deal’ to 15 percent from 10 percent previously and Deutsche Bank increased its chances to 15 percent from 5 percent. The confusion over the Brexit timeline and related risks has seen money markets reduce the chances of a Bank of England interest rate rise this year to 50 percent from 64 percent.

Elsewhere, China’s yuan and other emerging market currencies rallied against the dollar on optimism about the trade talks and ahead of the Fed decision, where hopes are high that Fed chair Powell may signal some easing of the pace of the central bank’s balance sheet rundown. The dollar index against developed currencies was higher, however, and Treasury yields were steady. Gold hit 8 month highs.

In European stocks, LVMH shares were seen jumping 2-5 percent after cheery results from the luxury conglomerate which said it is “cautiously” confident as fourth-quarter sales held up despite fears of a China slowdown. Ferragamo, on the other hand, could lose 2-3 percent, traders said, after the Italian luxury group reported sales fell in 2018.

Weaker results from Siemens were likely to take 1 to 2 percent off the shares. The industrial conglomerate reported weaker-than-expected industrial profit for its first quarter due to profits at its power business plunging.

— 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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