The UK Parliament has roundly rejected the Government’s proposed deal with the EU on Brexit. The defeat was widely expected, but the size of the deal is an overwhelming smack in the face for the Prime Minister and means the need for Plan B. The reaction on sterling would suggest that Plan B involves a far softer form of Brexit, along with a likely extension to Article 50. However the big question is whether traction can come from this or whether political paralysis will suck the impetus from the sterling rally. Although the UK is legislated to leave the EU on 29th March (with or without a deal), this will now surely be averted in the search for an alternative. A “no deal” (hard) Brexit is still a possibility, but there will now surely be a move towards preventing one. Although there has been a vote of no confidence already tabled by the opposition Labour Party, this is highly unlikely to succeed either and the Government will presumable plod along as they feel around for a softer form of Brexit that can command a majority in the House of Commons which is somewhere in the region of 70% in favour of the UK remaining in the EU. Sterling rallied last night because of this. However, equally there is paralysis in the Commons as there is no single version of Brexit that commands a majority. This paralysis may prevent sterling from rallying decisively further. Away from the UK, the fluctuations in risk appetite have swung a shade more positively this morning and the dollar is seeing more of a mixed outlook. The potential for further fiscal stimulus from China to combat the recent slowdown has helped to underpin a rebound on oil and equities.
Wall Street closed higher again with the S&P 500 +1.0% at 2610, whilst Wall Street futures are looking for this move to continue another +0.2% today. Asian markets have been uncertain how to read Brexit newsflow, with the Nikkei -0.5% but Shanghai Composite (flat) has been supported. European markets look set for a mixed to positive open with FTSE futures +0.1% and DAX futures +0.4%. In forex, there is a mixed look to the dollar today, although it is interesting to see it losing ground on a mildly positive yen. This comes despite the more positive outlook for the commodity currencies as the Aussie, Kiwi and Canadian dollar all shade higher. The euro is an interesting underperformer today. In commodities, the touch of dollar weakness is helping to support gold and silver, whilst oil is also steady after yesterday’s rebound.
As the dust settles on UK assets, there is another potential driver of direction on the economic calendar this morning, with UK inflation for December at 0930GMT. Expectation is that UK headline CPI will fall to +2.1% (from +2.3% in November) which would be the lowest level of inflation since January 2017, whilst core CPI is expected to remain at +1.8% (+1.8% in November). US Retail Sales will be at 1330GMT which are expected to show ex-autos sales growing by +0.1% in the month of December (+0.2% MoM in November) which would still be decent given that November contained Black Friday. The EIA oil inventories are at 1530GMT which are expected to show another crude oil drawdown of -3.0m barrels (-1.7m barrels last week), whilst dis