Markets fall quiet ahead of US jobs data, UK seeks longer Brexit extension

Morning Note

Market activity has cooled today as traders across the globe await the latest non-farm payrolls report from the US. Last month’s data showed a severe undershooting of forecasts, with jobs creation clocking in at just 20,000 compared to the 175,000 consensus. But wage growth was solid and unemployment dropped back below 4%, making the headline jobs number easy to dismiss as a blip.

But private American payrolls data from ADP – which traders have often believed serves as an indicator for the NFP result – delivered a big miss this week. Markets are now bracing for another soft jobs number. The Federal Reserve has already paused its plans to continue hiking rates, with the dot plot shifting lower and markets already pricing in odds of a rate cut this year. Another set of dire jobs numbers, combined with pressure from the White House to begin cutting rates straight away, could make it hard for the Fed to avoid committing to a much more dovish policy trajectory.

Just keep an eye on wage growth – a tight labour market should be delivering strong pay increases. A solid performance here could soften the blow of any downside surprise in the jobs numbers, especially as a late-stage economy will naturally struggle to keep adding jobs. A 49-year low for US jobless claims in the previous week also suggested that the labour market remains on good form.

UK prepared to participate in European Parliament elections in exchange for longer Brexit delay

GBP/USD is holding firm just below $1.3100, with traders reluctant to bid sterling higher despite the news that Theresa May has requested another Brexit extension. This time the UK is seeking to push back the official exit date until June 30th. The past week has been a good one for those betting against a no deal exit – cross-party talks and a further delay have both cut the odds of a hard Brexit.

However, there are two reasons not to get too optimistic on sterling.
Firstly, sterling so far has been largely unperturbed by the significant risk of a no deal before this week’s developments, so optimism is largely priced into cable already.

Secondly, May and Corbyn might be able to reach a consensus, but given the leaders’ strenuous relationship with their respective parties, there is still no guarantee that even a joint deal can make it through Parliament.

This delay is unlikely to go down well with Brexiters, especially as it means fielding candidates in the European Parliamentary elections – expect there to be little goodwill in Parliament towards May and her new deal.

Equities hold near highs – NFP overshadows talk of incoming trade deal

Equities are similarly shielded from the latest tailwinds by the proximity of NFP figures. President Donald Trump yesterday stated that a trade deal with China could be concluded within four weeks, with President Xi Jinping calling for talks to conclude earlier.

Global equities are soft for now, but are still on track to close on a solid footing. The STOXX 600 index is on track for its best performance in almost three weeks, while the DAX hasn’t fared this well since December 2016. Gains for the S&P yesterday saw the index notching the first six-day winning streak since February 2018.

Brexit compromise, dire PMIs, a lift for Facebook and a drop for Lyft

Morning Note

Facebook up on Deutsche Bank Instagram note, Lyft receives first “Sell” rating

Despite the negative news-flow swirling around Facebook as it battles concerns over privacy and extremist content, stock has continued to climb today, registering a 3.3% gain. A new note from Deutsche Bank states analysts believe that Friday’s addition of a Checkout on Instagram feature for the image-sharing platform could bring in revenue of $10 billion by 2021. Facebook is currently trying to move away from its reliance on ads, which currently generate 98% of revenues.

Finding alternative revenue streams is important for the company as it faces pressure to clamp down on who it is allowing to advertise, especially as the platform comes under scrutiny for the role of paid ads during elections and other political events.

At the other end of the spectrum is Lyft, which yesterday closed below $69.00; under its IPO price. The stock has been hit by its first “sell” rating. Michael Ward of Seaport Global has set a target price of $42 per share, claiming the current price represents a “leap of faith” in the willingness of consumers to forgo car ownership in favour of ride-hailing services.
Executives at rival ride-hailer Uber may not be looking forward to their upcoming float as much now. Lyft’s performance could significantly dent the price investors are willing to pay; it seems that holding a company valued at many times earnings and yet to post a profit isn’t quite the golden opportunity many first believed.

Looking at the wider markets, sentiment remains positive after fresh signs that the US and China are nearing a deal to end the months-long trade war between the world’s two largest economies. Recession fears are easing and global stocks climbed to six-month highs, while a move out of safety pushed the German ten-year yield back above 0%.

Asian shares hit a fresh seven-month-high, with the Hang Seng up 0.9% to break above the 30,000.00 handle before consolidating around 29,950.00, and the Nikkei 225 up 1.3% to flirt with 21,800.00.

European shares are also higher; the DAX has registered a 1% gain. Signs that the UK government may be moving towards a softer Brexit have helped nudge the FTSE up nearly 60 points; resistance remains around 7,400.00.

Cable caught between Brexit compromise and service sector stumble

Having exhausted all other Brexit options, Theresa May last night announced that the UK needed another short Article 50 extension, and extended an offer of talks to Labour leader Jeremy Corbyn. May still doesn’t want the UK to take part in European Elections, but wants to avoid a no-deal Brexit; currently scheduled for April 12th.

It marks a significant change in strategy, and cable responded positively. Sterling was up 0.5% against the dollar this morning, but gains were trimmed following a dire reading from the March services PMI. Analysts expected the reading to drop from 51.3 in February to 50.9, but the sector instead recorded a contractionary 48.9.

Taken together, the PMIs are waving a red flag for the UK economy. Only the manufacturing sector continues growing, and that is because of companies stockpiling ahead of Brexit.

The uncertainty facing businesses is an anchor on the UK economy, but can May and Corbyn craft a deal between them that appeases Parliament? The move certainly signals the Prime Minister is ready to consider a softer Brexit, but will anyone buy it?

During normal times, a consensus between Conservative and Labour leaders would have a strong chance of uniting the house. But we have to remember the circumstances and the leaders in question. Tories aren’t likely to vote for anything with Corbyn’s fingerprints on, while the Labour party isn’t exactly Corbyn’s biggest fan either.

Cable remains higher – a deal that potentially avoids further economic damage is clearly better than no deal that threatens even more (so markets believe). A soft patch for the economy can be overlooked if things get cleared up quickly, and hope this is the case has kept GBP/USD supported around $1.3175.


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