GBP remains vulnerable even after recovery and Google in focus for the wrong reasons

The pound has been a beneficiary of the government’s defeat in parliament last night that led to the de-selection of more than 20 Tory MPs, one of which is Winston Churchill’s grandson. MP’s have now taken charge of Parliament, which the markets have warmed to. The pound is up across the board today, GBP/USD is up nearly 1% to 1.2180, firmly out of the £1.20 danger zone. The FTSE 100 and 250 all had decent gains, even though the August Service Sector PMI points to a deepening recession for the UK in the third quarter. 

Is no-deal really off the table? 

The boost to the pound has come as markets interpret last night’s defeat for Boris Johnson as a means to end a no-deal Brexit and the market turmoil that may trigger. At the time of writing two things can now happen: 1, Boris Johnson wins a vote in Parliament to trigger an election on 15thOctober, or 2, the British Parliament forces the Prime Minister to get an extension to the 31stOctober Brexit deadline. I am no political expert, and the political alchemists in 10 Downing Street could yet unveil a new clause, bill or twist to the saga that changes the landscape yet again, but for now, it looks like a No-Deal Brexit has potentially been delayed, if not yet eradicated. 

No one trusts the polls, but…

However, although we do not believe that the government will win enough votes to trigger an election on 15thOctober, if there is to be an election in the next few months, the polls suggest that a Tory victory could be on the cards. The September 3rdpoll from Politico suggest that the Tories could win 34% of the vote, with Labour on 26% and the Lib Dems on 18%. This should be enough to give the Tories a decent majority in the next government, although it’s unlikely that this poll takes into account the recent de-selection of the 21 remain-supporting Tory MP’s and whether that could impact the Conservatives’ chances in the next election. Interestingly, Politico’s poll on the likely result of a second referendum suggests that Remain would win by 48%, with Leave on 43%. We all know that we can’t trust the polls, but how interesting would a Tory majority government alongside a more pro-EU electorate be for financial markets? It may incentivise the government to leave the EU with a deal, and if that is not possible then develop a better working relationship between our government and our European neighbours for the future of the UK’s economy. 

What this means for markets 

While this political pipedream is pound positive, we believe that the current climate of political uncertainty in the UK leaves GBP upside limited. We are walking in unchartered political territory, a no deal Brexit remains our main working scenario, and even if there is an election on October 15th, Boris may win with an actual majority, making any market optimism about a Brexit deal via a Corbyn/ Remain alliance government likely to peter out sometime soon. 

Why the Hang Seng and FTSE 100 have potential 

Stocks have been doing well today, European indices are brushing off political woes and taking their cues from a positive Asian session; the US markets are also recouping some of Tuesday’s losses. The Hang Seng surged more than 3% after its leader Carrie Lam said that she would withdraw the extradition bill, which has fuelled months of economically damaging protests. If the protests do calm down and Hong Kong returns to some form of stability then we could see further upside for the Hang Seng, which is one of the only major stock indices to remain in negative territory so far this year, it is currently down more than 5% YTD. 

From a stock market perspective, the FTSE 100 could be a relative outperformer compared to its European counterparts over the next few days. Germany also looks like it could be heading for a recession, the European banking sector is likely to take a EUR 2.5bn hit if the ECB cuts rates in its package of stimulating policies that are expected to be announced next week, and the oil price boost on the back of Hurricane Dorian may benefit the FTSE’s large energy sector. BP and Shell are up more than 0.5% on Wednesday, while Tullow is up more than 3%. Thus, UK stocks could once again diverge from the UK Brexit crisis and outperform their peers. 

Google: there could be trouble ahead… 

Google is also worth mentioning. A news report in the last 2 hours has said that evidence has been submitted to the Irish Data Regulator, that Google is using hidden web pages that feed personal data from its users direct to advertisers. This is a major breach of EU policies regarding privacy and Google’s own stated policies around data protection. Since data protection has become a sacrosanct tenet of web use in the last year or so, this is by far the most high-profile breach, and it could trigger some major fines and investigations/political showdowns for Google and parent firm Alphabet on both sides of the Atlantic. So far Google’s share price has not been impacted, but if this story gains more traction, and I find it hard to see how it won’t, we believe that Google could come under more downward pressure, which is bad news for the tech sector and for US indices more broadly. 

Overall, politics are still the driving force for financial markets. We remain wary of the pound’s strength, we believe there could be further upside for the FTSE 100 in the coming days, and Google could be in for showdown with the regulators, which may weigh on its share price.