Market Update: “Did I tell you the one about Brexit, Brussels and the black hole?”

As scientists from Belgium got all excited yesterday about the first ever image of a black hole from 53 million light years away, you could probably forgive the headline writers the obvious reference to the ongoing Brexit dramas. Of course, that’s not forgetting Halloween...

Last night, EU leaders decided to grant the UK an extension to October 31, with an option to leave in June if PM May can secure Commons support for the deal. This extension is dependent on participation in European elections, no reopening of the withdrawal agreement and ‘sincere cooperation’ – in other words, the UK does not try to gain a better deal by wrecking EU business.

Once again, it is difficult to predict where we go from here in the Brexit maze, but currently it seems very unlikely that Parliament will back May’s deal or there will be a breakthrough and agreement in cross-party talks. It appears only a matter of time before Eurosceptics in the Conservative Party try to install a Brexiteer into No. 10, who is ready to potentially take the UK out of the Europe without a deal. Remember too that the Tory party conference takes place in October. As Donald Tusk said, “our wish and hope is the UK will be ready with the final solution at the end of October, but I’m too old to exclude another scenario.” Sterling has remained fairly numb to proceedings as the ‘flextension’ was already priced in my markets. 

‘Super Wednesday’ also dished up the expected dovish hold from Mario Draghi. The ECB kept its forward guidance and benchmark rates unchanged and the latter are still expected “to remain at their present levels at least through 2019, and in any case for as long as necessary.” Risks to the outlook are still tilted to the downside and headline inflation should likely decline over the coming months. 

It was a somewhat defensive Draghi at times during the press conference as he accentuated the market’s dovish expectations and didn’t give any more details on the new financing operation (TLTROIII). These are now expected to be announced in June when the new ECB staff forecasts are published and dependent on the economic outlook and bank lending details. Any kind of tiering seems to be some way off and essentially a last resort in the monetary policy easing toolbox. The euro initially sold off during Draghi’s Q & A but again sellers have struggled to push the single currency lower. Speculative bearish positioning is extended and we think with alot of bad news seemingly in the price, near-term the risk/reward favours fading the weakness.

Finally, Federal Reserve officials kept their options open according to the minutes of the latest FOMC meeting as they weighed significant uncertainties over the US and global outlook. The minutes reiterated the Federal Reserve’s stance of pausing further rate increases for the rest of 2019. Of most interest perhaps is that several officials said rates could go either way and it seems that is hardly something which is going to push the odds of a cut above the current 55%. So, we do have a truly patient and data-dependent Fed.