Johnson still believes

Saturday’s extraordinary sitting of the house of Commons provided all the drama that is expected from a long-running soap opera but failed to provide the conclusion that a country suffering from “Brexit fatigue” desires.

All last week expectations grew that a deal could be struck, culminating in the agreement that was reached which was the product of compromise on both sides. The backstop has been removed but a border in the middle of the Irish sea keeps the frontier between the two halves of Ireland open. The DUP who had been supporting the Government withdrew that support feeling that Northern Ireland was being “hived off” despite Johnson’s claim that the deal gave the benefits of Brexit to the whole of the UK.

In the end, the debate on Saturday was inconclusive as the Government withdrew the vote on the deal as they lost a vote on an amendment which was designed to ensure that a no-deal departure couldn’t happen.

A “meaningful vote” will now take place today on the draft agreement and it is “too close to call” as to whether it will pass.

With rebellions on both sides and several of those MPs who were suspended from the Party for failing to support the Government looking to return, today will be another day of high drama.

The Prime Minister was forced to write to Brussels on Saturday evening asking for an extension but followed that immediately with a second missive in which he said that he didn’t expect it to be necessary. The second letter has been condemned by the opposition as possibly in contempt of Parliament.

The pound gyrated wildly last week as hopes and expectations were raised then dashed. It traded between 1.2515 and 1.2990 versus the dollar, closing at 1.2974. Overnight, it has lost a little ground, as traders await today’s developments. It is currently (0515 BST) trading at 1.2913.

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U.S. slowing more than expected

A further rate cut in the U.S. at the next meeting of the FOMC on 31st October is becoming more likely as evidence emerges that the economy is slowing more than had been anticipated. Data releases since the last rate cut have been inconclusive despite employment continuing to show some positivity.

Since reaching a high of 99.67 on October 1st, the dollar index has spent this month in a corrective phase. At the time of the last cut, members of the Committee were at pains both before and after the decision to comment that the move was “insurance” against any further slowing. Over the past few weeks, those same Fed Presidents have been more reticent in commenting, possibly fearing they are providing the market with a self-fulfilling prophecy. Under Jerome Powell, the Fed, in trying to stay one jump ahead of the market, has mostly only succeeded in providing a lack of clarity on its intentions.

Last weeks continued correction owed a great deal to the direction of two of the index’s main components. The pound was well supported by Brexit developments while the single currency rose almost by default as sellers grew weary of the continued lack of follow-through. It traded between 98.65 and 97.18, closing at 97.20.

Durable goods orders will be released on Thursday along with manufacturing and services activity indexes. These will go some way to providing a further indication as to the state of the economy as the market begins to follow its own path regarding rate cuts since the Fed is unable or unwilling to provide clarity.

Germany to drive stimulus

It had been expected (hoped) that following the Summit of EU Heads of Government last week that Brexit could be agreed, and the European Union would be able to get on with sorting out its own mess.

That proved, yet again, to be premature although there does now appear to be a genuine desire on Brussels behalf to get a deal done. This had been sadly lacking for most of the past year as disappointment at the inability of the UK Parliament to how it wanted to proceed led to animosity and antipathy.

With the very existence of the group under genuine threat from several quarters, it is to be hoped that the “changing of the guard” at the top of the pile may bring about the necessary reforms that have been ignored by the “old-guard”

There is little doubt that the “gravy-train” under the control of Jean-Claude Juncker has had its day and the “new-broom”, Ursula von der Leyen can bring about the sense of urgency and desire for change that has been sadly lacking under the current regime.

Now that Brexit is coming to a climax, the scene is set for Germany to “break ranks” and produce a package of measures to kick start its (and the entire region’s) economy. It is a real possibility that the measures will deal a death blow to the growth and stability pact which has become an outmoded and restrictive set of measures more akin to a different age. A more expansive set of rules need to be adopted which encourage investment built upon the foundations of sound fiscal policy. This should combine Italian spending and German frugality. It will be a marvellous trick if Ms’s von der Leyen and Lagarde can pull it off.

Last week, the single currency traded in a slightly higher range versus a subdued dollar. It traded between 1.0991 and 1.1172, closing at 1.1169.

This week is important for the activity data that will be released. Analysts are hoping for the best while fearing the worst. Expectations are for manufacturing output to rise marginally across the region while in Germany, a further fall could prompt radical stimulus measures.