Market movers today
Markets will continue to digest yesterday's defeat of Theresa May's Brexit deal (see more below), while attention will also turn to whether May's government can survive the 'no confidence' vote called for today at 20:00 CET and what Plan B she will present to the Commons by Monday.
On the data front, UK inflation figures for December will probably show another decline in headline inflation from 2.3% in November on the back of lower energy prices. With inflation slowly heading back towards the target, we do not expect the Bank of England to be in a hurry to deliver its next hike, especially amid the ongoing Brexit uncertainty. We recently changed our call for the next BoE hike from May to November this year.
Selected market news
As widely expected, PM Theresa May's Brexit deal failed in the House of Commons . The defeat, however, was bigger than expected, 432 against versus 202 in favour. In Brexit Monitor: The waiting game - Brexit edition , 15 January, we argue some outcomes are still more likely than others despite us being in uncharted territory. The likelihood of an extension of Article 50 has probably increased, so that is also something we are set to monitor (officially, May still sticks to the plan of leaving the EU on 29 March). A majority in the House of Commons has clearly indicated it is against a 'no deal' Brexit, which would only happen by accident, as it is the default option (15% probability). We continue to believe the probabilities of a soft Norway-style Brexit and snap election are low (10% and 5%, respectively). The two most likely outcomes are either May's deal (or something very similar) passing at a later stage as pressure builds on the politicians or a second EU referendum (40% and 30%, respectively) but British politics need to settle before we find out which way the UK will go.
Yesterday, we got more dovish signals from the Fed. While it was not a surprise that the Fed's Kaplan said the Fed could wait and see for ' a quarter or two', it was more noteworthy that the Fed's George, normally considered a hawk, said that the Fed should continue ' with caution' and that it might be a good idea to ' pause Fed rate normalisation'. She also said the impact of the balance sheet policy was ' unclear'' Overall, a very dovish message supporting that the Fed is on hold for now and likely until the June meeting. The comments, together with expectations of tax cuts from China, probably supported risk sentiment and S&P ended 1.1% higher yesterday.
ECB President Mario Draghi was also dovish yesterday, saying ' there is no room for complacency' as 'recent economic developments have been weaker than expected' and ' uncertainties remain prominent'' He believes ' significant amount of monetary policy is still needed to support the further build-up of domestic price pressures'. In particular, we take note of the 'no room for complacency' comment, which opens up for a dovish message after the next ECB meeting on Thursday 24 January.
Scandi markets
No market movers in Scandinavia today, but we are still following the negotiations on the government formation in Sweden.
Fixed income markets
The market continues to digest a significant amount of new syndicated deals without much impact on swap spreads and outright yields. Yesterday, Italy sold a record amount of bonds in a single syndicated deal, some EUR10bn in a new 15Y benchmark with an order book that was more than EUR45bn. Furthermore, the market reaction to the amount of Italian risk coming to the market was very modest. The 10Y Italian government bond lost 3bp and the spread to Bunds widened 5bp. However, the big performer yesterday was Spain, although we are awaiting a new 10Y benchmark from the Spanish Debt Office. Hence, we keep our long positions in 5Y Spain and Italy versus France and Germany, respectively. Today, we have a small tap in the 30Y Germany as well as tap auctions in Sweden and Norway. However, the big issue is the Brexit vote and the uncertainty going forward as well as the impact on the market. This is mainly an issue for GBP rather than rates. Furthermore, with Draghi sounding a bit dovish in yesterday’s speech, we expect a positive opening on the Bund future.
FX markets
EUR/GBP declined despite the vote against the Prime Minister’s Brexit deal being much larger than expected. As such, price actions resemble a ‘buy the rumour sell the fact’ and thus there was GBP short covering in the aftermath of the vote. It was widely expected that the PM would lose the vote and in that sense nothing has changed and all options for Brexit are still on the table. However, we are now in uncharted territory in terms of what will happen next and the next days of debate in parliament and not least the ‘no confidence’ vote tomorrow will be directional for GBP. We expect EUR/GBP to stay in the 0.88-0.9060 range until further Brexit clarification. As such, an extension of Article 50 would be positive for GBP as it reduces the risk of a ‘no deal’ Brexit, while pressure on GBP might increase due to rising uncertainty as 29 March moves closer. For an easy overview, see our Brexit Monitor: The waiting game – Brexit edition, 15 January 2019, and for more details see our Brexit Monitor: May is losing control over the Brexit process but not credible alternative has emerged yet, 11 January.
EUR/USD was little moved by the Brexit vote but fell below 1.14 on soft comments from Draghi. While we think the move towards 1.15 in the cross last week was justified, the latest softness hints that true EUR support is still lacking. This, in our view, suggests that upside in the cross is capped near term.
In the Scandies, EUR/NOK has moved to the low end of the 9.70s on Brent crude moving above USD60bbl again. In the very near term, the thin domestic data calendar leaves NOK price action in the hands of external developments.
