December 5, 2018 / 8:41 AM / 12 days ago

Daily Briefing: Brexit questions mount after government defeats

LONDON (Reuters) - The consensus on yesterday’s humiliating defeats for the government over Brexit is that a no-deal Brexit is somewhat less likely and Theresa May’s government has been weakened by lawmakers claiming back power for parliament.

Prime Minister Theresa May leaves 10 Downing Street, December 4, 2018
"It’s a false choice to say it’s the PM’s deal or chaos. We should look at all the options and not be boxed in by our own red lines"

Constitutionally, however, it is still far from clear-cut, with May still having the right to ignore any amendments parliament might make to the Brexit process if her deal is thwarted at the first vote on Tuesday.

Equally, she can now argue that hard Brexiteers should rally behind her deal to avoid their nightmare scenario of no Brexit at all – the more so following the European Court of Justice advocate-general’s view that Article 50 could be unilaterally revoked by the UK. The main debate continues today and will be watched for clues on how yesterday’s events have changed the mood.

One of the fallouts from Donald Trump’s decision to pull out of the Iran nuclear deal suspending sanctions on Tehran was the realisation by Europe’s leaders that, despite the European Union’s huge international trade clout, the dollar still holds sway as a tool of foreign policy.

That conclusion has largely been borne out by events since, with Europe failing to convince multinationals and other investors to defy Washington and continue to do business with Iran as the nuclear deal prescribed. Today the EU begins efforts aimed at giving it more weight in any future stand-off with a news conference of measures aimed at strengthening the international role of the euro.

More indications of policy U-turns are emerging from Paris, with the government spokesman saying it could have a change of heart on its wealth tax, whose scope has been narrowed under Emmanuel Macron – a development which consolidated his image among critics as "president of the rich". The spokesman noted that if a given measure was not working and was also costing the public money, then it should be changed.

MARKETS AT 0755 GMT

The volatility surrounding an event-packed December is playing out with gusto, with U.S. stocks recoiling more than 3 percent overnight as future recession flags within the bond markets wave furiously.

With U.S. markets closed on Wednesday to honour former President George H.W. Bush, who died at the weekend, the S&P500 on Tuesday failed to hold above its 200-day moving average and recorded only its fifth one-day drop of more than 3 percent this year.

The drop after Monday’s optimism about a Sino-U.S. trade truce was led largely by financial stocks, which are watching a dramatic flattening of the 2-10-year yield curve into single-digit basis points for the first time in 11 years.

Although not infallible, an inversion of the yield curve – where long-term borrowing rates fall below short-term rates – has preceded the last seven U.S. recessions. An inverted yield curve crimps banks’ interest margins and also affects the flow of credit in the economy as Fed policy rates rise again later this month. The yield curve touched a low of 9 basis points overnight, but has steadied about 11bp since.

Investors remain doubtful about a durable trade pact between Washington and Beijing, meantime, with U.S. President Donald Trump and his economic adviser Larry Kudlow holding out the possibility of raising tariffs on Chinese goods again if there’s no major concessions from China within the 90 days of talks that have just been triggered.

Although Chinese officials were hopeful of a breakthrough in reports overnight, Shanghai stocks fell 0.6 percent and Hong Kong stocks were down 1.5 percent. Tokyo’s Nikkei and Seoul’s Kospi were down about 0.6 percent, too. China’s offshore yuan fell after its biggest two-day gain in almost two years earlier this week and Australia’s dollar was lower.

European stocks were down more than 1 percent first thing, with German automakers lower after Tuesday’s meeting of top executives with Trump in the White House. Afterwards, the carmaker bosses said they planned to boost U.S. investments, but warned they would be unable to do so if the administration imposed new tariffs. Eyes were also on the Brexit debate in the UK parliament ahead of a critical vote next Tuesday.

Sterling gyrated on Tuesday – lifted initially as the European Union’s top court ruled the UK could unilaterally stop Brexit, then sliding to a 2018 low against the dollar when the government lost two votes that will force it to publish full legal advice on its EU deal as soon as today.

The pound recovered from that level, however, after an amendment was passed giving parliament a say over what happens next if UK PM Theresa May can’t pass her Brexit agreement on December 11.

Markets are betting there is a majority in the House of Commons against a no-deal Brexit, so sterling took solace that no deal at least was deemed less likely as a result. The pound was hovering just above $1.27 first thing Wednesday, up from the 2018 low of $1.2659.

— 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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