Pound bounces back with gloomy outlook in the background

Summary:

• Pound recovers but its strength could prove temporary, what’s next in terms of Brexit?
• Global equities are set to recover despite a gloomy ISM release, Fed’s Bullard may have injected some optimism
• In Q2 Australian economy expands in the slowest pace since 2009

What’s next now?

Boris Johnson suffered a humiliating defeat on Tuesday as MPs voted to take control of the House of Commons agenda, attempting to prevent Boris Johnson to take the United Kingdom out of the European Union. So what happens next? MPs have time by Monday to pass a new bill allowing the British government to ask the EU to postpone Brexit until January 31 2020. Hence, this will be the key point of today’s parliamentary session in London. Subsequently, a bill - if approved - could move to the House of Lords on Thursday. Looking to the past one may be almost certain that Brussels will agree to a British proposal to delay Brexit by three months thereby further prolonging uncertainty.  That said, one may say that September 9 has now become a small deadline in the never-ending Brexit saga. In the meantime, Boris Johnson may want to hold an early election, however, to do so he needs two-thirds of MPs to back this idea. Taking into account Labour’s unwillingness to hold a snap election it seems that a Johnson’s idea is doomed to failure. Nevertheless, there is reportedly another way to reach this goal by using a shorter law (a simple majority is needed) - in this case a snap election could take place on October 15. But, what happens if MPs are unable to pass a bill blocking a no-deal Brexit? Under these circumstances, a vote of no confidence in the government might take place. If the current government loses this vote, it could be granted a 14-day window to win another vote of confidence. If it fails to get enough support, then an alternative government (if it exists) could try to do so in order to avoid general elections. Of course, the UK has still a right to cancel Brexit altogether by revoking the Article 50.

The pound is rising this morning but its strength is unlikely to be long-lived given an array of political risks on the horizon (as outlined above). Source: xStation5

Increased optimism

Meanwhile, there is rising optimism across global equity markets on Wednesday morning with SP500 futures being up 0.6% (Wall Street suffered losses on Tuesday though) and major indices in Asia trading well above their yesterday’s closing levels (Hang Seng is leading the gains being up almost 1%). Increased exuberance may have something to do with a speech given by Fed’s James Bullard on Tuesday. He suggested that a 50 bps rate cut would align the US central bank with market expectations. Bullard also noted that aggressive action was needed given a dive in US bond yields as well as an adverse impact of the ongoing trade battle. These comments may have boosted investors’ hopes for such a big rate reduction and thereby helping stocks recover. We reckon that a Friday’s jobs report could be remarkably important in this context as the US labour market has been a bright spot for a long time, hence if some scratches occur there, it could be a warning signal for the Fed.  

Slowest since 2009

In terms of economic readings we were offered overnight it is worth paying attention to Australian GDP for the second quarter as it slowed down the most since 2009. The Australian economy expanded 0.5% in quarterly terms or 1.4% in annual terms, matching expectations. Moreover, the details do not look well with a contribution of private consumption slowing the most since 2013 and an impact of public consumption rising the most since 2004. Growth in the past quarter was mainly driven by net exports, which added as much as 1.2 percentage points to the annual pace of growth, the most since 2016. This of course is not surprising given the first current account surplus Australia posted in 44 years. Last but not least, investment spending fell 4% YoY and subtracted a full point from growth.

In Q2 the Australian economy expanded at the slowest pace since 2009. Source: Macrobond, XTB

In the other news:

• BoJ’s Kataoka said it was important for the central bank to take pre-emptive action given rising risks of inflation being out of the target

• Chinese services PMI increased to 52.1 in August from 51.6

• India’s services PMI slowed to 52.4 in August from 53.8

• Australian services AIG spiked to 51.4 in August from 43.9