February 6, 2019 / 8:34 AM / in 5 months

Daily Briefing: No-deal still has plenty of sterling downside

LONDON (Reuters) - Sterling will gain up to 5 percent if Britain parts ways with the European Union with a divorce deal but will slide between 5 and 10 percent in the event of a disorderly Brexit, a Reuters poll found on Wednesday.

Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/

As one market player put it, the rationale is to wait right up until the last possible moment to sell off in the hope of a last-minute breakthrough.

The latest crunch moment is PM Theresa May's trip to Brussels tomorrow to seek changes to the Brexit deal rejected by parliament; before that, she will meet DUP leader Arlene Foster in Belfast today while Ireland's Leo Varadkar will himself go to Brussels to re-emphasise Dublin's veto to any watering down of the Irish border backstop.

Fresh from agreeing to resolve a decades-old name dispute with Macedonia - which as a result will be signing its NATO accession protocol today - Greece Alexis Tsipras is out to improve ties with Turkey.

He is paying a symbolic visit to Istanbul's former cathedral, Hagia Sophia, today after talks with Tayyip Erdogan yesterday that ended with a call to resolve through dialogue the two countries' feuds over territory, Cyprus and energy.

However, he pushed back on Erdogan's call to help repatriate eight soldiers who fled to Greece following an attempted coup in 2016, saying that was a matter for the courts, not politicians.

Industrial orders are notoriously volatile - it only takes a couple of big items to skew the numbers - but the unexpected drop in contracts for “Made in Germany” goods announced this morning will add to concerns about the euro zone’s leading economy.

They fell 1.6 percent compared with expectations of a 0.3 percent rise, driven by a plunge in orders from outside the euro zone.

The closely watched Ifo indicator showed last week that German business morale fell for the fifth consecutive month in January, suggesting a downturn in Europe’s largest economy.

MARKETS AT 7:55 GMT

Australia’s central bank is the latest to signal policy easing in the face of global economic headwinds.

Having signalled a move to a tighter policy for almost a year, the bank’s governor, Philip Low, now says rates could go either way.

That’s knocked the Aussie dollar one percent lower.

It’s perhaps not surprising given Australia’s exposure to a slowing China.

What’s more, President Trump’s combative State of the Union somewhat cast a pall on markets as he disclosed no new infrastructure initiatives and instead raised the prospect of another shutdown should financing for a border wall not be forthcoming.

World stocks have stalled near two-month highs, with holiday-thinned Asia off to a lacklustre start, Europe opening flat to weaker and Wall Street futures likewise flattish.

Clearly, another catalyst is needed for further gains.

In the United States anyway, earnings are still looking pretty good — consumer giants such as Estee Lauder and Ralph Lauren lifted Wall Street last night while Alphabet, aka Google, also posted better-than-expected profits, helping New York’s tech index back to two-month highs.

Almost three-quarters of U.S. companies have beaten forecasts so far this season.

But Europe is another story altogether, with analysts continuing to cut their expectations for the fourth quarter.

Data mostly everywhere is also disappointing, the latest being the relatively weak U.S. service sector.

That pushed bond yields down and convinced market players the Fed would retain its dovish stance.

U.S. bond markets were also helped by solid demand at an auction of three-year notes, which saw the lowest yields since last April.

Later today, a bunch of U.S. industrial earnings are due, including Cummins, General Motors and Goodyear Tire.

On the data front, industrial orders in Germany will be watched to see if the recent run of awful economic data continues.

The economic weakness has given a boost to bond investors’ appetite, as recent euro zone bond sales show – and Italy is making use of the opportunity to issue a 30-year syndicated deal, just weeks after it enjoyed record demand at its first debt sale of the year to international investors.

In currency markets, focus has of course been on the Australian dollar’s one percent fall.

The other eye-catching currency is sterling, which slumped below $1.30 yesterday following a dreadful set of service sector data.

This morning, it seems keen to make an attempt at breaching the next key technical level of $1.29.

The dollar is within sight of a five-week high against the yen after rising 0.4 percent overnight; against a basket of currencies it is at a two-week high. The euro languishes at a two-week low.

European stocks are opening slightly in negative territory as a fresh new batch of earnings fails to lift spirits after a U.S. State of the Union speech which turned out to be a non-event in the end.

A key mover this session may be Daimler, which saw profits fall in the fourth quarter as the trade war and rising costs hit.

Quite a lot of action in the banking sector, which is struggling to keep pace with the STOXX rebound.

Pre-market indications are still mixed for BNP Paribas, which has lowered guidance but exceeded profit expectations.

Credit Suisse is seen retreating after saying it expects higher tax rates. 

Nordea, Handelbanken and Raffeisen are also not expected to impress traders. Things look better for ING, which is seen rising slightly.

It should also be a better day for Carlsberg and TomTom following their trading updates.

Vinci is seen losing a bit of ground after its results, which showed some impact from protests in France.

In London, Interserve which is working to avert a Carillion-style collapse, reached a deal to issue new shares worth 97.5 percent of its share capital, wiping out existing shareholders.

Two political developments to watch closely: first the European Union’s likely veto of the Siemens/Alstom rail merger and Macron’s difficulty privatising the company that manages Paris’ main airports.  

The dollar climbing for a fifth straight session spells trouble for emerging-market currencies, especially high yielders.

South Africa’s rand is down 0.5 percent to its weakest level in a week while Turkey’s lira and Mexico’s peso are down 0.3 percent.

Indonesia’s rupiah is the outlier, rising to its strongest in eight months following better-than-expected growth data.

India’s rupee hovers steady ahead of a central bank decision which is expected to deliver no change and Thailand’s policy makers opt to stay put as well.

Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz

More central bank decisions due later today with Poland, Iceland, Moldova and Brazil all due to announce latest interest rate decision as signs become clearer – especially after RBA decision – that the rate-hiking cycle may be nearing its end.

A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Sujata Rao. The views expressed are their own. 

 (Editing by Larry King)

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