Brexit deal approved in Brussels, equities in Asia move lower

Summary:

• GBP weakens despite agreement between the EU and the UK being in place

• Salvini shows room for budget negotiations saying no one is fixated on particular deficit target

• Oil bounces higher at the beginning of the new week

Investors in Asia launched new week on the back foot with shares in China and Australia moving lower on Monday. Stocks in Japan rose on the back of weaker yen with Nikkei (JAP225) being one of the region’s outperformers. The weekend was completely dominated by the European politics with special EU summit over Brexit being the key event.

While reaching agreement with the EU leaders can be seen as GBP-positive it should be noted that it was widely expected. Therefore no one should be surprised that the pound performs rather lacklustre on Monday morning. Source: xStation5

The UK Prime Minister Theresa May met with the European leaders on Sunday. As expected the European Union backed draft Brexit agreement tackling issues that still remained. The case of Gibraltar was resolved and in turn trade ties of the country will be subject to separate bilateral talks between Spain and the United Kingdom. While this may seem like a decent progress, it should be noted that the biggest hurdle - getting approval in the UK parliament - is still in place. However, as the agreement with the EU was reached Theresa May can now focus solely on winning approval from domestic lawmakers. She already announced that it will be her top priority in the weeks to come so that the vote can be held ahead of Christmas. Moreover, Theresa May and the European leaders warned the UK politicians that this is the best deal they can get and in case they do not back it “there is no plan B”. Having said that, the next few weeks may be crucial for the pound as the UK Prime Minister faces significant opposition at home with even her own ministers saying there is still a lot of work to do. With just 4 months until Brexit day in March next year the vote before Christmas may be the only chance for the United Kingdom to avoid chaotic departure from the EU structures.

EURUSD is moving higher at the beginning of the new week what can be to some extent ascribed to the developments in the European politics. Nevertheless, both EUR and USD are performing quite poorly trading lower against most of the G10 peers. Source: xStation5

Elsewhere, a promising sign could be spotted in terms of the Brussels-Rome budget spat. Matteo Salvini, the Italian Deputy Prime Minister and leader of League party, could be seen as making some “soft” concessions relating to the budget deficit target. Namely, asked whether the 2.4 percent budget deficit target is final and unchangeable Salvini said that no one is fixated at particular number as long as the country grows. He said that he does not care if the budget deficit will be 2.2 or 2.6 percent as long as it benefits Italy. Nevertheless, despite this being seen as making room for some negotiations the Italian populist government is not keen on dropping the will to deliver its election promises. Salvini said that his pension reform, that would see retirement age lowered, could come into life as early as February. Let us recall that the European Commission rejected the revised Italian budget draft and launched the excessive deficit procedure against the country. In case the outstanding issues are not resolved it could lead to EU imposing fines on Italy.

The steep drop on the oil market that happened on Friday was halted in the vicinity of local peak from September 2017. The upcoming G20 meeting may offer some relief to oil bulls ahead of OPEC meeting scheduled on early-December. Source: xStation5

Oil prices plummeted on Friday bringing both major grades, WTI and Brent, to the lowest levels in over a year. Concerns over potential oversupply of the commodity continue to play a major role in the ongoing sell-off. The OPEC meeting scheduled on 6 December may result in a joint action of the oil producers to halt decline but solution may be worked out even earlier. The upcoming G20 meeting in Buenos Aires will be a good opportunity to discuss situation on the oil market as well. As the event will be attended by the Crown Prince Mohammed bin Salman, the Russian President Vladimir Putin and the US President Donald Trump there is a scope for some meaningful talks about oil. However, it may not be too easy to reach the agreement as bin Salman and Putin definitely would enjoy higher oil prices (Russia and Saudi Arabia are reasonably dependant on oil) while Trump expressed his endorsement for lower oil prices and called for even lower prices last week.

In other news:

• Russian war fleet attacked Ukrainian military ships near the peninsula of Crimea

• Switzerland rejected the idea of renegotiating international treaties in a referendum

• Japanese manufacturing PMI falls from 52.9 pts to 51.8 pts in November (exp. 53 pts)