Pound closes in on $1.32 handle
There’s been further gains seen in sterling this week, with the pound moving up to its highest level since early November and closing in on the $1.32 handle once more. The GBP/USD rate is now higher by almost 4% since the low made shortly after PM May’s deal was comprehensively rejected in parliament and the markets are clearly of the belief that the chances of a no deal have diminished significantly. Tuesday will see the PM put what is essentially the same deal back before the Commons and, unsurprisingly this is likely to be met with a firm rebuttal once more.
Softer Brexit becoming base case scenario
However, as we’ve seen with the market reaction since May’s deal was first rejected, should it fail to pass next week then this will rather counter-intuitively possibly provide more support for the pound. It appears that the consensus believe that May’s deal is the “hardest” form of Brexit that can occur, and therefore it being rejected paves the way for a “softer” version to prevail - and provide a more favourable outcome for the pound. The rationale behind this is pretty sound but it it worth pointing out that markets have been wrong footed by Brexit once already, when the pound rallied strongly in the week leading up to the referendum, and while this may now be seen as the base case scenario it is still far from a foregone conclusion.
UK stocks lag their peers
The FTSE 100 has posted its first weekly drop of the year and in doing so ended a 4-week winning streak that has seen a pretty impressive rally of around 7% off the lows made just before Christmas. The declines appear worse given that European markets have build on last week’s gains and after a couple of attempts to push lower the US benchmarks have recovered well which leaves the UK as something of a laggard. For sure the appreciation in the pound has weighed on the large portion of the index that generates its income in non-GBP terms, with the Oil majors for instance, which hold a weighting of over 15% of the total index, both seeing sizable declines on the week.
Vodafone share tumble
The biggest faller of the blue-chips was Vodafone, with the stock plunging over 5% and languishing at the bottom of the FTSE leaderboard. The stock has lost more than a third of its value in the last 12 months and investors have clearly taken a dim view to the latest trading update. The figures themselves aren’t shockingly bad, with organic revenue still rising, albeit by only 0.1% compared to 0.5% in the previous quarter, but the headline revenue numbers don’t look too clever. Group revenues for Europe fell by 5.6%, and 11.1% for the rest of the world and despite CEO Nick trying to put a brave face on it, there are very real concerns that the business has had its heyday.