Pound swoons on Brexit fears; US stocks remain near recent highs

Summary:

• Pound drops to 2-year low as no-deal prep ramped up

• US stocks remain near record highs

• Pfizer drops and Mylan jumps on merger talk 

• DE30: Volkswagen sinks as subsidiary disappoints with earnings

The pound has gotten off on the wrong foot at the start of the new week with the currency sliding across the board and falling to its lowest level in over 2 years against the US dollar. While the Bank of England rate decision on Thursday could be a decent market moving event for sterling, Brexit continues to be the dominant theme with a noticeable harshening of the rhetoric in recent days raising concerns amongst traders. Implied volatility from options markets has moved up to its highest level since early April, and a closer look at the skew of these derivatives reveals that downside protection is trading at a growing premium and becoming increasingly more expensive. 

UK foreign secretary Dominic Raab has captured the tone of the latest position from the government in saying that the EU will need to move on Brexit in remarks that have done little to help the pound’s plight. PM Boris Johnson will today hold his first meeting with the Brexit cabinet, something which is scheduled to become a daily occurrence running up to the present deadline for the UK to leave the EU on 31st October. Even though the stated aim is to avoid a no deal outcome, the belief amongst the cabinet is that preparations must be made to make the threat of this eventuality plausible, and therefore enhance their negotiating position to reach a preferential deal to the one currently on offer. Despite this posturing, significant hurdles would have to be overcome for a no-deal Brexit to be delivered but just the expressed intention to pursue this path is enough to weigh on the pound for the time being.

Stock markets across the Atlantic have begun the new week close to where they ended the last one with major indices a little lower on the European cash close. Friday saw the S&P500 make a new record high and while the Nasdaq  and Dow Jones both failed to chalk up a fresh milestone, they remain within striking distance of all-time peaks. 

News that Pfizer is set to combine part of its business with Mylan has caused some sizable moves in both stocks in pre-market trade, with the former trading in the red and the latter jumping strongly higher. The all-stock deal would see each Mylan share converted into one share of the new company with Pfizer shareholders owning 57% of the combined entity and Mylan the rest. The divestiture relates to Pfizer’s off-patent drug business and will see it join forces with generic drug maker Mylan. Estimates at the combined company’s annual sales are in excess of $20B. In other related news, Pfizer reported adjusted earnings per share of $0.80 for the second quarter, beating estimates by $0.05. Mylan beat the street by $0.08 on the same measure and posted EPS of $1.03. Pfizer shares are lower by around 2% while Mylan has seen a flurry of buying activity, with gains somewhere in the region of 15% early on, although these have since been paired back to trade up by 7% at the time of writing. 

Volkswagen (VOW3.DE) is also trading lower today. The German carmaker underperforms after Traton, its subsidiary, announced earnings for the first half of the year. Traton managed to increase operating profit by around 25% in the first six months of 2019. However, it was not enough to win shareholders’ appeal as order intake declined 6% hinting at prevailing weak demand.