Supreme Court ruling draws focus back to Brexit

Morning Note

Brexit comes back to bite us today with the expected ruling on proroguing from the Supreme Court. The decision is due at 10:30am. Whilst there is significant headline risk from this event, it’s hard to see how it materially alters matters vis-a-vis getting a deal or not. However, the market and the algos will likely see a ruling against the government as sterling-positive, and one in its favour as sterling-negative. Any rally or drop is likely to be faded. 

GBPUSD is holding in a very tight range around the 1.2450 region. Looking for a rally north of the last swing high at 1.2490 before the recent month-high at 1.2570. On the downside, look for support at 1.240 and past resistance at 1.2380. 

The US was flat yesterday and Europe softer as fears about global growth post the German PMI numbers dominated sentiment. The S&P 500 was largely unchanged as it remains trapped in this consolidation pattern around the 3,000 level. Hong Kong, Shanghai and Tokyo are up a touch overnight.

European markets are looking a touch better, with some mild gains seen in early trade, but we sense investors will be searching for direction again today and confidence is not particularly high. German Ifo numbers later will be closely watched as the market really starts to focus on the weakness in Germany. 

On trade, Trump scolded Treasury boss Steve Mnuchin over the cancelled farm visit. Noise. High level talks are resuming soon – hope will likely win out over expectation. Markets set for a big disappointment when there is no deal.  

Overnight, the data continues to look bad as Japanese manufacturing slipped to a 7-month low. 

The retreat in real US yields and a broader risk-off mood has helped gold rally off its base. Having consolidated around the $1500 level, bulls have taken charge again. With gold prices pushing up to $1526, price action is threatening to break out on the upside of its recent range towards $1550. Last glance gold was at $1521, if it can’t break out of the range then we could see a move back to the lower end. US 10-year yields have retreated from their mid-September highs around 1.9%, but have yet to plumb the early-Sep lows a little above 1.4%. 10-year TIPS have held close to zero and may well turn negative again. The PCE numbers will be of vital importance this week. 

Oil has rallied off the lows but continues to look under pressure as it continues to make lower highs after each rally. WTI was last at $58.30, having touch lows around $57.40 yesterday. The trend is lower but we have some way to go to close the gap to the pre-drone attack close. 

There is a real geopolitical risk premium still in play after the Saudi attacks, but the fundamentals for the market have not changed and remain pretty bearish – I.e. the world is awash with plentiful crude supplies and demand growth is heading south. If there is no trouble in the Middle East then oil has to fall, but assuming ongoing tensions and the threat of more attacks and escalation on the Iranian front then prices should be fairly supported. Meanwhile shorter term we are getting so many conflicting stories on the outage and how quickly production is coming back on stream it’s hard to know for sure how bad the immediate supply impact is. The measured response so far from the US and Saudis is quite likely to keep a lid on prices. However oil remains exposed to upside shocks from any flare up. Volatility is assured. 

Equities 

TUI shares jumped 7% yesterday after the collapse of Thomas Cook. Today it’s provided an update to the market reiterating the previously announced full-year ebitda guidance. TUI pointed to a number of external challenges facing the sector – the grounding of the Boeing 737 MAX fleet, continued Brexit uncertainties and too much airline capacity. Management say they will  therefore focus on becoming more cost competitive in Markets & Airlines  to protect and extend market share where possible. TUI can expect to gain market share post the TC collapse, but clearly there are still plenty problems in the packaged travel market that are not going away.

Another big blow for Metro Bank as it is forced to pull its £200m bond sale. It shows the kind of mire Metro is in after the accounting error and now expanding FCA investigation. It’s crazy to think it was offering 7.5% on these notes and still couldn’t get the demand. This is a worrying sign that the bank is not able to raise fresh debt and/or capital when the going gets tough.  

Better from the AA as it sticks to its FY guidance and reports a stabilisation in membership and improved growth in insurance underwriting. H1 revenues +2% to £491m, with operating profit +3% to £120m. PBT +50% to £42m. Free cash up to £44m. Members have stabilised around 3.2m and the insurance business saw 22% growth in motor policies to 803,000 and 3% growth in home policies to 841,000.