- FTSE rallies to highest level since October
- Brexit deadlock shows little sign of ending
- UK Construction secotr remains in contraction territory
The FTSE has edge higher this morning, moving above the recent peak to trade at levels not seen since last October. The gains come as risk assets have made a bright start to the week, with equities around the globe and crude oil rallying after better than expected manufacturing data from both China and the US. Figures from the Eurozone further supported the recent slowdown for the bloc, but in aggregate it seems that investors are looking through the negatives to focus on the positives and while this remains the case further upside could lie ahead.
The FTSE has moved up to its highest level since October today, with price probing the 61.8% Fib retracement of the larger decline from the all-time high seen back in May 2018. Source: xStation
Brexit deadlock shows little sign of ending
Monday was another day another false dawn as far as a breakthrough on Brexit was concerned, with MPs once more failing to deliver a decisive outcome after the second round of indicative votes.There had been some speculation that the so-called “Common market 2.0” was set to emerge as the frontrunner with Labour whipping in favour of the motion, and the pound made steady gains throughout the day on hopes of a shift towards a softer version of Brexit. Ultimately, this proposal came up short and was actually the 3rd most popular in the end and it is becoming ever more readily apparent that MPs can’t unite behind a single proposal. The nature of the voting isn’t helping matters, with support in the high 200s for 3 separate motions but there hasn’t really been much progress in terms of additional votes for these since the first round.
The GBPJPY is back at the 8 and 21 EMAs which remain in a negative orientation. 143.70 could be seen as key support. Source: xStation
Derivatives markets reveal growing concerns for GBP
The most likely outcome remains either May’s deal or a Customs Union - which amount to pretty much the same thing and in effect would be barely distinguishable while the Irish backstop is in place - but no-deal risks are clearly rising. The Lion’s share of focus has been on the UK side with the parliamentary impasse, but it is worth considering the EU’s standpoint and their strong opposition to allowing the UK to participate in elections next month if the UK is still planning on leaving. A no-deal outcome would hurt both sides, but the UK are far more vulnerable to the immediate shock and the EU may well feel it’s own adverse impact is a small price to pay for stopping their elections being dominated by Brexit and all the negative ramifications that could bring.
The pound itself isn’t showing too much concern at the prospect of no-deal, with the currency remaining in the range that has contained its price against both the US dollar and Euro for the past couple of months. However, the options markets are starting to get a little jittery, with investors clearly looking to take more downside protection in recent weeks, with the 1-month GBPUSD risk reversal dropping to its lowest level in almost 3 years - essentially showing that investors are willing to pay a higher premium for downside protection (put options) than for upside (calls).
Concerns surrounding a no-deal Brexit and the large downside risk it would mean for the pound can be seen in the options markets, with the 1-month risk reversal falling to its lowest level since June 2016. Source: Bloomberg
Construction sector remains in contraction territory
For the second month running the construction sector in the UK has been in contractionary territory with the PMI for March coming in broadly in line with expectations at 49.7. This reading shows little change from last month’s 49.5 print and confirms the slowdown in the sector. There have been a couple of occasions in recent years where a one-off print has dipped below the 50 mark which denotes contraction/expansion but this is the first time two successive prints have indicated as much since the data for August 2016. The weakest subsector was commercial construction, which includes shops, offices and factories with respondents unsurprisingly blaming Brexit uncertainty.
Overall UK PMIs have deteriorated in recent months with the pick-up in manufacturing largely due to Brexit stockpiling and therefore receiving a short-term boost that will likely revert in due course. Source: XTB Macrobond