Market buzz: May's Brexit backstop plan rejected, pound and FTSE oscillate
1544: The pound is off its worst, but down 0.25% against the dollar at 1.3389, is helping erase the FTSE's losses. The blue chip index was just in positive territory an hour and a half ago but is back in the red by 0.37% at 7,676.24.
1524: The DUP, Theresa May's Northern Irish friends, says Michel Barnier’s comments "demonstrate he has no respect for the principle of consent or the constitutional integrity of the United Kingdom".
"This is nothing more than an outrageous attempt to revert to the annexation of Northern Ireland. We will not accept such a proposal.
"Mr Barnier fails to understand that both the Labour party and the Conservative party have already indicated that his proposed backstop is not acceptable. No prime minister could ever agree to any arrangement which would threaten the economic and constitutional integrity of the United Kingdom."
They may be missing the point.
1502: 10 Downing Street confirms the UK government will not accept an Ireland-only backstop, which is what the EU is proposing in its own backstop proposal.
"The prime minster has been clear that we will never accept a customs border between Northern Ireland and the rest of the United Kingdom," a government spokespersons said. "We are also committed to maintaining the integrity of our own internal market. That position will not change. The commission’s proposals did not achieve this, which is why we have put forward our own backstop solutions for customs.
"All parties must recall their commitment in the joint report to protect the Belfast agreement in all its parts. Michel Barnier has confirmed today that discussions will now continue on our proposal."
The EU's chief Brexit negotiator said he rejected the UK backstop plan but mainly as he says it is not a full backstop as it does not address regulations during the backstop period. He also said it was not necessarily “feasible” to extend the EU’s offer of continued participation in key elements of the customs union in Northern Ireland to cover the whole of the UK, which is what he said the Prime Minister’s proposal suggests.
Barnier "rejected a proposal the UK hadn’t made", says Sam Coates of The Times on Twitter. "Actually UK only suggesting customs bit UK wide, not turning whole protocol UK wide. My sense is it’s still game on...."
1409: The European Union's chief Brexit negotiator, Michel Barnier, has rejected the UK's backstop proposal.
“Let me be very clear. Our backstop cannot be extended to the whole UK. Why? Because it has been designed for the specific situation of Northern Ireland,” he said.
“What does it do? Northern Ireland would form part of our customs territory. What is feasible for a territory the size of Northern Ireland is not necessarily feasible for the whole UK.”
The Frenchman later took to Twitter to clarify that he was not rejecting the UK customs paper, which was released yesterday, on which "discussions continue".
To avoid any confusion between the EU backstop & the UK customs paper: I reiterate that our backstop cannot apply to whole UK. 4 freedoms are indivisible. This is not a rejection of the UK customs paper on which discussions continue. #Brexit
— Michel Barnier (@MichelBarnier) June 8, 2018
1259: After Amazon elbowed its way into the UK football broadcast rights market and BT's boss Gavin Patterson was victim to the Spanish archer today, telecoms analysts at Macquarie say their greatest fear for the UK market "is should Amazon resell FTTp connectivity with its Prime TV offer. This would upset the current market structure more substantially".
1258: Commenting on the week ahead, economists at BoA-ML have brough forward their forecast for the ECB's announcement of an end-date for its policy ofquantitative easing, from the July meeting of the Governing Council to June's.
"But it seems the ECB is in a hurry to close the QE chapter. We think this is essentially political: the central bank does not want its monetary policy to be tainted by accusations of supporting or conversely impairing the new policy course in Rome," they write.
Regarding the BoE, they are saying that a November hike in Bank Rate is "more likely" because the recent improvement in PMIs "may not last long".
1231: Interesting insight, in our opinion, from Mohammed El-Erian, who writes in Bloomberg that: "And while the Fed has shown that a “beautiful normalization” is indeed possible, it remains to be seen whether all three central banks can deliver this simultaneously."
On a related note to El-Erian's comments, and as investors lower leverage, today (possibly sent to clients yesterday) BofA-ML strategists point out how: "Peak-to-trough Brazil (EWZ) -34%, Eurozone banks (SX7E) -29%, Chinese real estate (SHPROP) -26%, Argentine peso (ARS) -25%, Turkish lira (TRY) -25% [...] all "leverage plays"; while FAANG stocks +29% as investors pursue scarce secular growth [...]."
1204: Emerging market currencies continue to trade on the back foot, with the US dollar 1.46% higher against the Brazilian real to 3.9071, up by 0.86% to 4.5228 against the Turkish lira and 0.33% higher versus the Argentine peso to 24.9850.
South Africa's rand was also coming under heacy selling pressure, with the Greenback adding 1.53% to trade at 13.1739.
1012: Retail in-store sales were down by a significant 6.47% on a like-for-like basis this week, says BDO's High Street Sales Tracker for the week to 3 June, versus a base of +3.38% for the same week last year.
This week included the Spring bank holiday Monday and half term school holidays for many areas, like last year, but this week the UK was hit by sporadic spells of torrential rain and localised flooding which hurt footfall.
Fashion LFLs were down by 7.81% this week, the third negative in-store week for fashion in succession, with six of the last ten weeks seeing negative results.
Homeware LFLs were down 8.71%, meaning negative in-store LFL sales growth in seven of the last ten weeks.
0940: UBS is positive on BT, as the telecoms group puts the phone down on boss Gavin Patterson, thinking the news "could be positive for investor sentiment given change could help reset a difficult relationship with the regulator and government in recent quarters" but questioned the wording of the announcement that implies no change to strategy.
"The BT board remains supportive of the recently outlined strategy suggesting no significant strategic changes. However, we think issues that an incoming CEO will have to address are: the pace of FTTH rollout at Openreach; the strategy around BT Sport; the future of Global Services; execution of the Transformation programme and how much of the £1.5bn pa of cost savings should be re-invested back into the business."
0919: Congo mining minister Martin Kabwelulu has told Reuters that regulations to immediately implement the controversial new mining code will be signed into law today. Apparently, there will be no concessions to the requests of the mining industry.
Also news around Congo for Glencore, as Congolese-American businessman and convicted fraudster Charles Brown has launched a lawsuit against Glencore, according to Bloomberg. Apparently, he claims that his 19% interest in Mutanda Mining was fraudulently sold to Glencore in two transactions in 2007 and 2012, and he wants his shares back plus US$1.14bn in compensation and damages.
Glencore, which currently owns 100% of Mutanda, world's largest producer of cobalt and a major source of copper, said it intends to “vigorously defend itself in the current legal proceedings”. Glencore is also facing lawsuits from the controversial Gecamines and the billionaire Dan Gertler.
0829: With emerging markets including Brazil, Turkey (see earlier) in turmoil over US dollar strength, rising interest rates and the spectre of a global trade war, investors continue to flock to safe US Treasuries, says Mike van Dulken at Accendo Markets in his opening note to clients.
MVD notes oil prices coming back from overnight highs, though Brent is still $76.93, in spite of global supply concerns from Venezuela and Iran and uncertainty over OPEC/Russia’s plans to curbing their voluntary production cuts.
"Safe-havens like gold are struggling, and USD strength hurting FTSE miners, the hinderance on metals (copper off highs) overpowering the benefit of a slightly weaker GBP as uncertainty prevails about UK PM Theresa May and Brexit."
0812: A catch-up on emerging markets from Pantheon Macroeconomics on last night, as Brazil and Mexico's currencies fall 3.3% and 2.2% in the past week. BofA Merrill Lynch was also saying that the EM correction has "further to go".
Brazilian investors are speculating on a possible action by the country's central bank with the locally traded US dollar on the rise and likely to impact inflation, while political uncertainties also weigh on local equities.
"In Brazil, spread sentiment has joined ongoing concerns about the presidential election, the reform efforts under the new administration, and rising fiscal risk. The historically low carry hedge is playing against the BRL, and recent temporary shocks, such as the truckers’ strike and the forced exit of the Petrobras CEO, have added fuel to the fire."
Pantheon sees interest rate hikes as early as 20 June as likely if the pressure does not abate, possibly with a 50bp hike, instead of the usual 25bp increase, if the BRL plunges rapidly. "Inflation expectations are already rising."
Mexican assets have also performed badly, with the peso the weakest in a year.
"Concerns about NAFTA, the recent imposition of tariffs on steel/aluminum products and the corresponding Mexican retaliation, have all aggravated the situation," Pantheon says on Mexico. "Trade tensions likely will remain high over the coming weeks, and the MXN and local rates will continue to underperform."
0810: A peek at key Asia data: China's trade performance was resilient in May with imports surging more than export growth to surprisingly reduce the monthly surplus. Japan's first quarter GDP contracted by 0.6% QoQ as initially estimated, as declining consumer expenditure offset resilient investment.
China's trade surplus surprisingly edged down to $24.9bn in May, from $28.3bn in April, below the consensus for a rise to $33.3bn, as imports rose 26% year-on-year and export grew 12.6%. "Those rates are likely to slow in the coming months," reckons Peel Hunt.
Pantheon Macro adds: "The May data leaves the trend in exports unchanged, but the trend in imports is picking up. We suspect the uptick in import rises is a product of price effects with the PMIs unanimously pointing to faster input price increases in May, though the price indices that we use for the trade data seem to have be discontinued in February, making it difficult to corroborate that. The product breakdowns lend further evidence to this theory, however, with energy import growth in particular remaining speedy in value terms."
Japan's real GDP growth was unchanged in the final reading, with GDP contracting by 0.2% q/q in Q1. Growth in Q4 was revised up, to 0.3%, from 0.1% previously. Japan the unadjusted current account surplus fell to ¥1,845bn in April, from ¥3,122bn in March, below the consensus ¥2,077bn. "Q2 should be better, but trade wars threaten the key external sector," says Peel.
0805: The FTSE indeed starts lower, down 48.43 points or 0.63% to 7,655.97.
0737: The FTSE 100 is seen tumbling around 47 points this morning, according to City traders, after a little Wall Street wobble.
US stocks were mixed overnight, with the Dow up, while the Nasdaq ending its four-day streak with technology declines sending the index lower.
The Dow Jones Industrial Average was up 0.38% at 25,241.41, while the S&P 500 lost 0.07% to 2,770.37 and the Nasdaq 100 slid 0.79% to 7,152.83.
0733: German industrial production data for April and the trade balance add to the evidence that the economy is unlikely to rebound strongly after Q1’s slowdown, says Capital Economics.
IP is down 1.0% on the month, weaker than the consensus forecast of a 0.3% increase, pushing the annual growth rate down to about 2.0%. Admittedly, March’s increase in production was revised up from 1.0% to 1.7%, so April’s fall came from a higher base. Construction activity rose 3.3% on the month, suggesting that its weakness in February and March was largely down to bad weather.
April’s 1.7% decline in IP excluding construction "was still disappointing and sets the sector up for a weak Q2".
0714: Some company stories - BT Group chief executive Gavin Patterson will step down later this year after the telecoms giant's board wielded the axe after pressure from major shareholders.
And Lloyds Bank says it had sold its remaining 3.3% in Standard Life Aberdeen (SLA) for £344m.
0659: The risk-off sentiment yesterday was more evident in the fixed income markets than in equity markets, says Marshall Gittler at ACLS Global.
Emerging markets were in focus, particularly Brazil, where the stock market crashed 3% yesterday and was at one point down over 6%, with bond market trading was halted as the benchmark three-year bond yield soared past 10%, and the currency fell to a two-year low.
Turkey meanwhile stopped its currency collapse by tightening policy for the third time in less than two months. The dollar gained on this risk aversion while 10-year US Treasury yields fell 5 bps on the flight to safety.
The big event today is the start of the G7 Leaders’ Summit in Charlevoix, Canada, says Gittler, where discussions about trade are likely to be more like heated arguments. Last weekend, the G7 finance ministers (actually, the G6, because obviously the US didn’t participate) expressed their “unanimous concern and disappointment” about the tariffs on metal imports that the US imposed recently. The six issued a statement calling for “decisive action” to resolve the issue at this weekend’s meeting. The US sanctions on Iran are also likely to be a topic of conversation.