LONDON (Reuters) – You would think that the rejection of one Brexit deal — in fact the only deal on the table — should make the chances of a no-deal exit more likely. Yet nothing in this saga is clear-cut.
Goldman Sachs, for example, concludes after Theresa May’s crushing defeat last night that the prospects for no-deal have actually “faded further” and that we are moving towards a softer, later Brexit.
The rationale is that, assuming May survives tonight’s confidence vote, the opposition Labour Party could push for either a second referendum or a softer version of May’s deal based on membership of a permanent customs union.
Variants of that interpretation are shared by others in the City, who are lending support to sterling moves this morning. Business is much less sure. It might simply be a lobbying position but the Institute of Directors now believes the UK is “staring down the barrel of no deal”. The European Union is expressing similar worries in public.
Among the things to watch now: any further EU reaction (Michel Barnier is speaking this morning); to what extent May genuinely reaches out for a cross-party consensus; and whether proponents of a second referendum seek to include that option in an amendment to the new motion May is expected to put forward by Monday.
The Greek parliament is to hold a confidence vote later this evening in Prime Minister Alexis Tsipras, who called it following the resignation of his right-wing coalition partner over a deal to end a decades-long dispute between Athens and Skopje over Macedonia’s name.
Tsipras is banking on support from smaller parties to see him through — but it’s close. There will be an equally tight vote on ratification of the Macedonia name-change.
Further protests against Serbian President Aleksandar Vucic are due in Belgrade tonight, a day before he welcomes Russian President Vladimir Putin for a scheduled visit. Protesters in Belgrade have also accused Vucic of preparing a negotiated settlement with Kosovo, a key precondition for Serbia to join EU.
Belgrade enjoys Russia’s backing in its opposition to Kosovo independence declared in 2008, almost a decade after a brutal 1998-1999 war there. Putin’s visit is seen as a popularity booster for Vucic and his ruling coalition, and his supporters have scheduled a major rally for Thursday to welcome the Russian president.
MARKETS AT 0755 GMT
With the pound gyrating but breaking little new ground and world markets eyeing the drama, the UK political impasse plays out for another day on Wednesday. The heavy parliamentary defeat for Prime Minister May’s negotiated Brexit deal overnight now leads to a confidence vote in the government this evening.
May is expected to survive the vote, which would reduce the risk of a snap election, but no one is any clearer on the next steps on Brexit — with radars up for the European Union’s response, attempts at cross-party UK talks and May’s formal response to the deadlock on Monday.
So far on Wednesday, senior French and German ministers have indicated there will be no major changes to the EU’s existing offer but openness to delaying the March 29 Brexit date. EU Brexit negotiator Barnier said it was too early to assess the impact of last night’s vote as it’s still unclear what exactly the UK wants.
For sterling, its brief pre-vote slide on Tuesday was quickly reversed against the dollar and it remains roughly where it was against the dollar this time yesterday — about $1.2863. It did break higher against a generally weaker euro late on Tuesday to set its highest since November.
The broad market stance toward the pound is that the “worst case” scenarios of a no-deal Brexit or a snap election are still relatively low probabilities and much of the other permutations and combinations of outcomes would allow a relatively cheap pound re-rate higher once the headline risk abates.
But there is little conviction either way, with major global investors such as UBS Wealth Management advising clients not to take big directional bets and remain wary of all UK assets for the time being.
Still largely tracking the pound’s movements, the UK’s FTSE 100is expected to open slightly lower. Although speculation about the Bank of England’s next policy move seems fruitless given the political vacuum surrounding Brexit, BoE chief Mark Carney speaks this morning and UK December inflation numbers are due for release.
More broadly, Asian stock markets were little changed or slightly lower first thing on Wednesday — stalling after Tuesday’s brisk gains. Even though world markets have been encouraged by the resumption of Sino-U.S. trade talks, their scepticism about a lack of detailed progress was borne out overnight as U.S. trade representative Robert Lighthizer said there was still no movement on structural trade issues such as intellectual property rights.
On the flipside, U.S. stocks were supported overnight as one of the leading Federal Reserve hawks — Kansas City Fed chief Esther George — said she was open to the possibility of a pause in the Fed’s rate rise campaign.
China’s central bank also continued to lean dovish with another big injection of liquidity into local money markets on Wednesday.
With Germany’s 2018 GDP release on Tuesday showing a slowing economy that just skirted recession in the final quarter of the year, European Central Bank chief Mario Draghi also underscored the emerging weakness of the euro zone on Wednesday — supporting market pricing that sees no ECB rate rise this year.
Elsewhere, Turkey’s lira — one of the underperformers so far this year — jumped nearly 1 percent ahead of a central bank meeting in which policymakers are expected to keep the key interest rate unchanged at 24 percent.
Russia’s rouble strengthens 0.4 percent with oil prices climbing for a second straight day and Brent crude regaining $60.
Italian bond yields dip a day after Italy drew record demand for a new 10 billion euro 15-year bond — its first syndicate debt sale in a year.