Parliament blocks no-deal Brexit, pound advances
The Brexit process continues to dominate headlines. The House of Commons voted by the narrowest of margins (313-312) to force Theresa May to ask the EU for an extension beyond April 12. Lawmakers, not the government, will decide the length of the delay, subject to the EU’s approval. The pound advanced, as the probability of a no-deal outcome may have declined a little in the eyes of investors, though the magnitude of the move was smaller than what has become the norm on Brexit news.
For now, market attention remains on the May-Corbyn talks that will continue today. In particular, it will be interesting – and potentially beneficial for the pound – to see whether May finally shows some flexibility on the prospect of a permanent customs union. That would be anathema to several die-hard Brexiteers in her party, as it would prevent the UK from striking its own free trade deals with other nations, but it would solve the thorny issue of the Irish border, and likely provide her with enough votes to push the deal through. Even the DUP hinted it could be ‘open’ to a customs union yesterday.
Stocks extend winning streak as trade optimism lingers
US equity markets recorded modest gains, with the benchmark S&P 500 index (+0.21%) closing at a fresh six-month high. Meanwhile, the Nasdaq Composite (+0.60%) outperformed, rapidly approaching its all-time peak. Optimism that a trade deal is looming continues to ride high, with the latest reports suggesting that Washington will allow Beijing until 2025 to meet many of the agreed commitments. However, disagreements on intellectual property protection and the enforcement mechanism of a deal remain unsolved. Top-level negotiations will continue today in the American capital, and markets will likely take their cue from any remarks pointing to progress, or the lack thereof.
In the broader picture, while there may still be some more upside in store for risky assets if the two sides continue to play up the likelihood of a deal, it is becoming increasingly clear that investors have already priced in a positive outcome to a large extent. Stocks are now near all-time highs amid a barrage of optimistic trade headlines in recent months, with significant help from ‘cautious’ central banks as well, no doubt. The bottom line is that markets largely expect a deal already, which implies relatively limited upside in case one materializes, but perhaps significant downside if this narrative changes.
Coming up: ECB minutes and Fed-speak
The economic calendar is light on Thursday, with the most noteworthy release being the minutes from the latest ECB meeting, at 11:30 GMT. That was the gathering where the central bank ‘shocked’ markets by pushing back the timing of its first rate hike, on top of announcing new ultra-cheap loans for commercial banks. Hence, it’s reasonable to expect a relatively dovish tone in these minutes, underscoring policymakers’ concerns around growth. In any case, considering the upward revisions in the final Eurozone PMIs for March yesterday, investors may prefer to wait until next week’s ECB meeting before they draw clear conclusions about the outlook for policy, and by extent for the euro.
In the US, we will hear from three Fed officials: Williams (13:00 GMT), as well as Mester and Harker, both at 17:00 GMT.
In Canada, the Ivey PMI for March is due out.