Brexit remains a key uncertainty for UK assets, whilst the Italian budget is also important in Europe, and developments in the US/China remain crucial for risk appetite. We take a look at the implications that these factors are all having on forex, equities and commodities markets.
The political situation in the UK is febrile. Following Theresa May’s announcement of a proposed Withdrawal Agreement, the governing Conservative Party is imploding. Brexit is a terrible mess and political risk is growing. It is now all about the arithmetic. Hard-line Brexiteer MPs are unhappy with Mrs May’s deal, believing the UK will be too tied to the EU after the UK leaves on 29th March 2019. Subsequently a Conservative leadership contest appears imminent, driven by just 15% of Tory MPs willing to oppose their leader in writing (ie. 48 MPs). However Theresa May is a significantly resilient leader and will fight any leadership contest. To win she would need to 158 of the 316 Conservative MPs. With c. 60/80 Brexiteer MPs against her so it would need a considerable number of moderates to lose faith for her to lose a simple majority (although suggestion is that if she lost over 100 MPs it could make her position untenable). It is therefore likely that Mrs May would win a leadership contest which could ironically bolster her position as leader, meaning no further contest for another 12 months. However, the arithmetic then turns to the even more difficult with the task of getting her (apparently unpopular) deal through Parliament. For this she would need considerable support from opposition parties, again extremely difficult. A loss could lead to a Parliamentary vote of no confidence. It seems the UK is on track to another General Election. Uncertainty is huge, sterling moves reflect this. As options volatility spikes higher, expect a rough ride trading sterling, with further weakness the risk.