Market Commentary – More Brexit Deadlock

Morning Note

Brexit deadlock as Parliament plays the fool on April 1st

It reads like an April Fool’s story, but it’s unfortunately true; while a bunch of semi-naked climate change protesters demonstrated in the viewing gallery (allegedly even supergluing themselves to the windows), MPs voted against all four Brexit alternatives in another round of indicative votes. 

It’s now just ten days to go until the UK is set to leave the European Union with no deal in place. The EU has been doing its best to act nonchalant, but chief negotiator Michel Barnier stated that a long extension was possible, given enough justification. A sign of jitters from Europe, or simply another attempt to make sure the EU doesn’t get the blame for the UK’s misfortune? 

Not only are the odds of a no deal exit significant, but chances of a general election are also sizeable. Labour has already stated that it is on election footing, and it’s hard to see how the current government could negotiate anything after Brexit even if Theresa May’s Withdrawal Agreement miraculously scrapes a majority during a likely fourth vote. 

Cable has slipped on the latest results but has already cut losses in half since the morning session began, rejecting the $1.3020 handle and climbing back towards $1.3050. Such a small move suggests markets are still yet to price in the high chance of a no deal; traders are holding out hope that the UK will somehow blunder its way into a longer Article 50 extension. 

In this respect cable is somewhat akin to a cartoon character that has run off a cliff, yet continues to go straight until it eventually realises it has run out of ground. The gravity of the situation will hit at some point, leaving a big potential downside for GBP/USD unless the government can magic an almighty rabbit out of its incredibly empty hat. 

Fourth day of gains for FTSE 100 

The UK’s blue-chip index has risen for four consecutive sessions now, with oil companies pushing the index higher, helped by sterling weakness. Shell and BP are leading the index higher after yesterday’s Chinese manufacturing data pushed crude prices higher; unexpected growth in the Asian superpower has softened fears of a global slowdown. Shell is 0.6% higher, while BP has ticked up 0.5%. 

Other strong movers include HSBC (0.8%), spirits-maker Diageo (0.8%) and Unilever (0.9%). On the other end of the scale is Rolls-Royce, which has dropped 2% after premature blade deterioration was found on two Boeing 787-10 jets equipped with the company’s Trent 1000 TEN engines; Singapore Airlines has grounded the planes. 

Elsewhere global indices are softer after yesterday’s strong gains, with Asian stocks consolidating a seven-month high. European stocks are edging lower. 

Cryptocurrency rally sends bitcoin rocketing above $5,000 

The crypto market has raced higher this morning, with bitcoin on track for its biggest one-day gain in a year after breaching $5,000 – a level not seen since November 2018. The 25% gains were quickly trimmed, but BTC remains up 15% at around $4,765.00. 

Other major cryptos are enjoying strong gains as well; litecoin is 13% higher, bitcoin cash up 10%, ethereum 9% higher, and ripple up 8%. Crypto fans are celebrating the beginning of the long-prophesied bull market, but such jubilance is premature. Technical indicators suggest caution, with the RSI for BTC trending around 90 – anything above 70 is considered overbought. 

The rally added $17 billion to the value of the crypto market in under an hour, but traders are struggling to identify the cause of the uptrend. 

Market Commentary – China, Brexit and easyJet

Morning Note

Markets distracted by Chinese manufacturing growth, Brexit votes continue, easyJet issues profit warning 

Data showing surprise growth in Chinese manufacturing during March has stoked gains for equity markets today. Asian stocks are leading global indices higher; the Hang Seng gained over 500 points, while the Nikkei rose 300 points. European equities followed suit, led by Germany’s DAX, which broke through 11,700.00 before trimming gains to trend around the 11,650.00 handle. US futures indicated a higher opening, with the Dow above 26,100.00 and the NASDAQ indicated 1% higher around 7,470.00. 

China’s Caixin manufacturing PMI climbed into positive territory for the first time in four months, printing at 50.8 against analyst expectations for a reprint at 49.9. Even more notable was the rise in staffing levels in Chinese factories; the first recorded since 2013. 

Progress in US-Sino trade talks has helped increase external demand, but the bulk of new activity was as a consequence of renewed stimulus by the Chinese government. But one positive reading from China does not a crisis avert, and markets might want to take a look at the latest numbers from the Eurozone before dropping bonds and rushing back into equities. 

Manufacturing in the euro area saw its largest decline in almost six years last month, with powerhouse economy Germany leading the drop. The German PMI tumbled to 44.1 – lowest since July 2012 – while the aggregate currency bloc indicator fell from 49.3 in February to 47.5 in March. 

US manufacturing data is set for release this afternoon; February saw a worse-than-expected decline – another could slam the brakes on the equity rally. 

UK parliament ready to vote on further Brexit options 

Cable has found strong bid this morning, with 0.5% gains taking GBP/USD back towards the key $1.3100 handle. However, positive moves for sterling are less to do with developments in the UK political sphere and more to do with a move out of safe-havens as described above. The dollar is also down versus the euro, Aussie, and Kiwi. 

MPs are getting ready to hold another series of indicative votes today, with some of the defeated motions returning for a second attempt, although others have been replaced with new options. On the menu are everything from ruling out a no-deal exit to demanding a no-deal exit, a referendum to prevent a no deal, and a referendum on any deal passed by Parliament. 

It’s hard to see any of these options gaining a majority after the events of last week, which leaves us awaiting a fourth vote on Theresa May’s Withdrawal Agreement. The Prime Minister may threaten a general election should the proposal fail, which seems unlikely to sway many who opposed the deal, considering most of them are the opposition parties and even many Conservative MPs have openly called for one. 

Turbulence for UK airlines as easyJet issues profit warning 

Rising costs and Brexit have hammered easyJet’s bottom line. The company announced it expects to make a pre-tax loss of £275 million during fiscal 2019 – up from an £18 million loss in the first half of 2018. The company also stated that it was “cautious” with regards to the H2 outlook. 

Bookings for early summer have seen revenue per seat rise slightly, but in the first half the metric is expected to have dropped 7.4% in line with guidance issued in January. Increased passenger numbers are forecast to have pushed revenue 7.3% higher to £2.34 bn, in-line with the analyst consensus. 

First-half costs are guided 19% higher thanks to the cost of fuel and investment in measures to minimise summer disruption, with preparations including spare planes and crew. 

EasyJet shares dropped 8% on the news, with read-through seen across the sector. Ryanair fell 3.2%, while IAG – owner of rival British Airways – slipped 1.5%. 

For easyJet, the damage from Brexit uncertainty is the impact it is having upon consumers; the company itself is well-prepared for even a no deal Brexit. The EU Parliament has approved air connectivity legislation and the UK has confirmed it will reciprocate – allowing UK and EU air carriers to continue operating. 

US-Korea Talks End Without Deal, Oil Slips, IAG Results

Morning Note

US talks with North Korea have broken up without a deal. South Korean shares fell sharply as the meeting broke up, with Asian shares broadly in the red. I don’t think this will ultimately have too much bearing on global indices in the longer term, but for now with hopes of a deal with China on trade not exactly fading, but certainly not rising, it’s 0 from 2 for Trump this week and risk sentiment is suffering as a result. The combination of the lack of progress with North Korea and China will drag on equities and we might have to wait for a new catalyst to renew the bullish start to the year.

The FTSE 100 opened down 0.6%, extending its recent run of losses as it approached 7060. As we noted in yesterday’s note, the drop below 7100 brought this important 38% retracement level into focus. Below lies the 7000 round number target for bears, which is roughly where the channel trend support kicks in. 

Oil was on the defensive as US production hit a fresh record and weaker Asian PMIs pointed to slackening demand.  

China’s manufacturing PMI fell for a third straight month in February, slumping to a three-year low. Meanwhile Japan’s industrial production notched up its biggest fall in a year, slipping 3.7% in January. A definite sense that this is a symptom of the ongoing trade tensions and with no resolution in sight, data should continue to slacken and this will likely weigh on equities.

Brent has come off its highs following the large drawdown of US inventories on Wednesday, with the $67 level now looking like firm resistance. We may now expect some consolidation in the $65-$67 range.  In forex, following the votes last night not a lot has really shifted on the Brexit front leaving the pound hovering near its highs but a little off. GBPUSD was last at 1.3285, having risen above 1.33 yesterday.

EURUSD was steady at 1.1380 having failed to break the key 50% Fib retracement. Broadly the dollar is doing the work here as it has come off its lows.  

IAGstrong performance in face of headwinds, questions remain 

This was a strong performance from IAG against a tough backdrop for the sector with higher fuel prices, air traffic control disruptions and foreign exchange headwinds. Operating profit and the dividend are a beat versus expectations. 

Fourth quarter operating profit came in at £655m, delivering operating profit of €3.23bn before exceptional items, up 9.5% from a year before. 

After completing a €500 million buyback last year, IAG plans on returning more than €1.3 billion to shareholders via ordinary dividends of €615 million, whilst also announcing a special dividend of  €700 million. Fuel costs jumped 18%, so the flat performance on total cost per ASK looks like a good performance.

IAG also announced it is buying 18 Boeing 777-9 aircraft, plus the option on 24, for BA., underlining its confident outlook. Based on current oil prices and exchange rates, 2019 profits are expected to be broadly flat with last year. If anything that smacks of being too cautious.

Questions remain though for IAG. It’s been a tough time in the last few days after being dropped by MSCI from its global indices after changing foreign ownership rules to meet EU rules ahead of Brexit. Passive funds have been forced to sell IAG shares and the stock has suffered. It’s also in a spat with the Civil Aviation Authority over a deal with Heathrow.  And the entire European short haul sector still has big question marks over demand and supply in 2019, not least because of Brexit. But having walked away from Norwegian, highlighting management’s capital discipline, investors should remain on side.

Shares have jumped 3.6% with investors shrugging off the slightly uncertain outlook and embracing the special dividend.


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