Another Brexit impasse

Chris Scicluna
Emily Nicol

After the S&P500 yesterday closed slightly higher on the day, the main Asian markets today have largely seen a mix of modest gains and losses, as mixed news on earnings (a miss from Amazon but a hit from Intel) offered no clear direction. So, for example, the Topix closed up modestly for a fourth successive day, edging up 0.2%, shrugging off the news of the resignation of Isshu Sugawara, Japan’s Minister for Economy, Trade and Industry, over electoral law violation allegations. Sugawara had been appointed by PM Abe to the Cabinet post just last month. Among other things, he had been responsible for oversight of the nuclear industry, which itself has since last month been dogged by allegations of illegal payments to Kansai Electric Power Co. He was also responsible for trade relations with Korea, which have soured badly over recent months to the detriment of Japanese exports and foreign visitor numbers. Trade relations with the US, however, are handled by Foreign Minister Motegi. Abe has asked former Minister for Regional Revitalisation Hiroshi Kajiyama to take over from Sugawara, and the scandal currently appears unlikely to have a particularly marked adverse impact on the PM’s ratings.

Elsewhere, China’s CSI300 closed up a larger 0.7% but the Hang Seng is down on the day in the wake of yesterday’s speech by VP Pence, which was critical of China’s human rights record and highlighted recent events in Hong Kong. US stock futures have ticked up while the dollar is stable. And in the bond markets, USTs are little changed from late yesterday (10Y yields around 1.76%) but JGBs have weakened further at the short end of the curve. 2Y yields are up almost 2bps to above -0.24%for the first time since early August.

Moving to Europe, ahead of the latest German ifo survey due in a short while and after yesterday’s disappointing flash PMIs, this morning has brought a significantly weaker German consumer confidence survey (detail below). But the main story is UK political uncertainty, which mounted yesterday as PM Johnson eventually announced his plan to propose formally to Parliament on Monday a pre-Christmas General Election. Having rallied yesterday on these events, however, Gilts and euro govvies have opened lower this morning as the chances that Labour MPs – whose consent will be required – will back Johnson’s wheeze now appear to be low, at least unless the EU offers an unambiguous Article 50 extension to end-January.

Given yesterday’s events, however, while EU ambassadors will meet to take stock this morning, the EU’s decision on the length and detail of the latest Article 50 extension seems now unlikely to be taken before Monday, to wait first to see whether the position in the House of Commons might be a little clearer. But the likelihood is that the parliamentary stalemate will continue well beyond the start of next week. Johnson is evidently winging it, with little grasp of the detail of the Brexit deal that he agreed last week with the EU, and seemingly capable only of Government driven by political stunts and bluster rather than analysis and strategy. Of course, Labour leader Corbyn has long been way out of his depth too. And so while we have no doubt that the Article 50 deadline will be extended in due course, UK political noise and Brexit uncertainty will remain the order of the day.

Following yesterday’s disappointing PMIs, which implied that Germany’s manufacturing sector remained in deep contraction mode at the start of Q4 and also suggested increased negative spillovers from the industrial sector woes to the services sector, today’s ifo business survey seems likely to emphasise the downside risks to the near-term economic outlook in the euro area’s largest member state. Indeed, the headline business climate index seems likely to fall back to one of the lowest levels since 2012, perhaps with deterioration in the indices for current conditions and the outlook alike.

This morning’s GfK consumer confidence survey also offered a less optimistic assessment of German economic conditions at the start of Q4. In particular, the headline sentiment index was forecast to fall 0.2pt in November to 9.6, matching the weakest level since April 2017 and one that was last lower three years ago. And this followed a downwardly revised reading for the current month of 9.8.

Indeed, according to GfK, ongoing concerns about the global economic slowdown, geo-political tensions and Brexit were augmented by a more downbeat outlook for the domestic labour market, particularly in the financial and autos sector where several manufacturers and suppliers, including VW, Continental and Brose, have already announced planned redundancies. And with risks that Germany has slipped back into recession in Q2 and Q3, households were the most downbeat about the economic outlook since 2012. There was also a notable weakening in households’ income expectations, with the relevant index falling sharply in October to the lowest for almost six years. But while households’ willingness to buy slipped back at the start of Q4 it remained with the range seen over the past year, and therefore consistent with ongoing positive, albeit subdued, household spending growth.

Other euro area/US:
Elsewhere, the Bank of France President Villeroy de Galhau, who opposed last month's recommencement of QE, will speak publicly in Paris. And in the markets Italy is due to sell 2Y BTPs ahead of an announcement later today by S&P on its Italian sovereign ratings. In the US, finally, the week will conclude with just the revised University of Michigan consumer sentiment survey for October.



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