Pound Falls On Theresa May Brexit Comments, EU Unemployment Stable At 9.8%, ASX SPI200 Futures Down 21 Points

Markets on Monday primarily focused on news coming out of Europe, specifically the Euro-zone and the U.K. In an interview on Sunday U.K. Prime Minister Theresa May prompted fresh concerns over a “hard Brexit”, one where the U.K. prioritises curbing immigration over access to the single market. Traders focused specifically on her comment “we mustn’t think about this as somehow we are coming out of membership but we want to keep bits of membership”. In reaction the Pound fell -1.01% against the U.S. dollar and -1.35% against the Euro.

The truth is that no one really knows how negotiations to leave the EU will turn out, there are many moving parts in a situation that has not happened before and political risk is difficult to quantify. Quite often we hear “soft” or “hard” Brexit which are both very realistic outcomes, however there is also the strong likelihood of the outcome falling somewhere in the middle. In fact May also stated that the decision was “not binary” and that she would outline more details in the coming weeks ahead of triggering Article 50 which will formally begin negotiations to withdraw for the EU.

Ahead of this, at some point this month we will also have the U.K. Supreme Court ruling as the whether or not the PM needs the approval of parliament before triggering Article 50. If the ruling goes against May this will certainly tone down concerns over a “hard” Brexit while a ruling in favour will stoke concerns over a “hard” outcome.

The good news is that out of every situation comes an opportunity, and for U.K. markets this is provided by the Pound reacting as it should. By declining approximately 19% since late June 2015 the falling currency has provided a cushioning effect for the U.K. economy making goods and services cheaper and more competitive.  A declining currency can also have negative effects, particularly when declines are unorderly however for now things are OK. The first chart below shows the effect of the falling Pound in boosting the FTSE100 to new record highs, up +0.38% overnight to 7,237.77. The one caveat being able to find the right hedge against declines in the Pound.

Meanwhile the Euro gained +0.30% overnight against the U.S. dollar while equity markets were lower following EU unemployment data. The unemployment rate for November remained unchanged from October at 9.8% and down from 10.5% one year earlier. Following an uptick in inflation for December this will add to the increasing conversation that the ECB should in fact look to taper the current stimulus program as opposed to the current expiry of December 2017. This weighed on equity markets overnight with declines led by both the Euro Stoxx 600 & DAX30 which closed -0.49% & -0.30% weaker respectively. Opposition will increasingly come from Germany and while the Euro-zone outlook is improving, the story has still been one of stabilisation rather than a robust recovery and is yet to be seen whether this momentum can be sustained.

Locally the ASX200 finished higher, up +0.90% at 5,807.45 now technically in a bull market having risen over 20% from the February 2016 low shown on the second chart below. However we can expect a weaker start to trading this morning with ASX SPI200 futures down 21 points. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account.

Data releases:

·         Australian Retail Sales (MoM Nov) 11:30am AEDT

·         Chinese CPI & PPI (YoY Dec) 12:30pm AEDT

·         U.S. Wholesale Inventories (MoM Nov) 2:00am AEDT

Chart 1 – GBP/USD (Blue) & FTSE100 Index (Purple)

Chart 2 – ASX200 Index

Source: Rivkin, RivkinTrader

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3600.

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