Sterling reacts positively to no-deal removal

In a dramatic evening in Parliament, more than twenty Government MPs voted in favour of a cross-Party motion to take control of the legislative agenda today and debate a motion that effectively takes a no-deal Brexit off the table.

As he had intimated, Prime Minister Boris Johnson confirmed that he will table a further motion today calling for a General Election. However, it is not that simple for Johnson since he needs the support of two-thirds of MPs in order to call an election. In a fiery exchange, Leader of the Opposition Jeremy Corbyn said that a decision on no-deal should be taken before an election. Having been calling for an election for the past two years, the Opposition now finds itself in a difficult position as it will be torn between an election and the blocking of no-deal.

Earlier, one Government rebel took the unusual, if not unprecedented, step of leaving the Government and joining one the of the Opposition Parties. This meant that the Government’s majority disappeared. In normal circumstances, that would itself have led to a General Election, but these are far from normal times.

It is now impossible to imagine any other outcome of yesterday’s events than a General Election since Johnson has confirmed on several occasions that he will not be the one who goes to Brussels to ask for another extension to the Brexit deadline.

Today’s events are sure to be no less dramatic than last evenings, as the drama continues to play out.
Sterling recovered a little leading up to a vote as has been seen on several occasions. Traders value the defeat of a no-deal Brexit to the political chaos that will now ensue. It fell to a low of 1.1958 versus the dollar early in the day before recovering to close at 1.2080 and has continued to rally overnight. So far (0530BST) it has reached a high of 1.2113.

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Fed to be moved by the latest data?

Yesterday’s release of data for manufacturing output in the U.S. showed that the economy appears to be slowing more rapidly than had been expected. The Purchasing Manager’s Manufacturing Index (PMI) fell into contraction. This was wholly unexpected by the market.

Following last month’s read of 51.2, a marginal fall to 51 had been expected. With a figure of above 50 indicating expansion and below, contraction, the data took traders by surprise.

The clear inference of a slowing of manufacturing is that the Federal Reserve will come under more severe pressure to cut rates aggressively.

St Louis Fed. President James Bullard, a voting member of the FOMC for 2019 said yesterday that the Fed should consider cutting short-term interest rates by 50 basis points in order to align the Central Bank with market expectations. While that is a worthy sentiment, the Fed should be independent of any outside influence despite seeing the same data as market analysts.

So far, President Trump has not commented on the data or the renewed pressure on the Fed which is in line with his demands, although any weakness in this week’s employment report is likely to bring a stinging response.

The dollar index fell initially following the release of the data to a low of 98.92, closing at 98.98. With the weakness of the single currency which makes up 57.6% and the pound (11.9%), the dollar is unlikely to fall far despite the clear evidence that the economy is slowing.

Is the euro in terminal decline?

No matter what happens in the global economy, it appears that the Eurozone and the single currency will be affected more than any other country/currency. Yesterday’s data release in the U.S. could have serious consequences for Eurozone exports, in particular, the auto industry which already has the threat of tariffs hanging over it.

With monetary policy at its most accommodative the likelihood is that quantitative easing will be reintroduced by the ECB at its September meeting. It remains to be seen if “QE2” will have the desired effect since the “same old issues” of structural inadequacy remain at the heart of the Eurozone’s problems.

Fiscal stimulus is what is needed, but the inability of the region to enact such legislation is going to continue to hamper the process. The weaker economies, spearheaded by Italy, desperately need to see the relaxation of the Growth and Stability Pact.

They are crying out to be able to inflate their way out of the current slowdown. Incoming ECB President Christine Lagarde has urged Brussels to relax the rules. Although there has been a commitment from Brussels to “simplify” the rules they need to be amended to such an extent as to allow countries like Italy to massively invest in social and infrastructure projects.

Unless the rules are relaxed there seems little hope of any recovery in the medium term with short term improvement impossible to imagine.

Yesterday, the euro fell to a low of 1.0925, although it recovered to close at 1.0974. It is now entrenched below 1.1000 and even a weakening of the U.S. economy is unlikely to save it from further losses.