UK Cabinet to vote Brexit plan, stocks fall after mixed data from China

Summary:

• UK PM Theresa May and the EU have agreed on a Brexit plan, it will be voted in the Cabinet later today

• Asian indices fall over oil concerns and after mixed data from the China’s economy

• Japanese economic growth disappoints being affected by natural disasters

Moving forward

The British pound has seen massive rises over recent hours being propelled by the newest revelations regarding Brexit. Namely, the EU and the UK have agreed the draft text on a Brexit agreement (at a technical level), according to BBC citing a cabinet source. Now, after months of intensive negotiations a deal proposal will be submitted to vote in the cabinet during a special meeting held at 2:00 pm GMT on Wednesday. Even as this agreement could be successfully passed in the cabinet it will not mean the ultimate end of the battle. Keep in mind that after cabinet’s approval the agreement needs to be passed in the Parliament and it seems that it will not be an easy task. Therefore, assuming that the Parliament votes down the deal, then some scenarios are on the table. First of all, snap elections might be called. Secondly, PM Theresa May might be ousted clearly increasing odds for a hard Brexit. Finally and possibly the least likely option is to hold a second referendum allowing Britons to vote again. On top of that, one needs to remember that Wednesday is the official deadline given the UK by the European Council leader Donald Tusk hence ‘material progress’ needs to be made in order to call a special summit later this month. Even as we are being constantly flooding by a lot of contrary information on this topic, it shows that both sides want to hammer out a binding solution and this should be GBP positive after all.

The pound broke through a resistance placed nearby 1.2960, the it got back to this level, tested it, and shot up again - all of these moves imply that technically we have a strong signal to buy. Nevertheless, one needs to be aware that the GBP will be driven by Brexit developments therefore volatility will be for sure heightened. Source: xStation5

Mixed data bag from China

Looking at Asian equity markets we may notice quite a bloody day with indices in Shanghai and Hong Kong declining 1% each. The Australian benchmark closed 1.7% lower while the Japanese NIKKEI added merely 0.2%. Gloomy moods seen in Asian could be a by-product of what we have seen in recent hours in the oil market. Both grades (Brent, WTI) plummeted on Tuesday even as the OPEC’s monthly report suggested possible production cuts next year on the back of a faltering demand (the global economy is expected to slow down further) and supply growth in non-OPEC countries. As a result, WTI prices dropped even to below $55 per barrel while Brent prices broke $64. In the morning both grades are trading slightly lower again with WTI being at the lowest since November last year and Brent the lowest since March this year. Plunging oil prices depressed stocks on Wall Street as well, and as a consequence the SP500 (US500) erased all its early gains and closed 0.15% lower. The NASDA (US100) closed flat while the Dow Jones (US30) fell 0.4%. Over the Asian session we were offered mixed data from the China’s economy for October. Industrial production grew 5.9% YoY beating the consensus of 5.8% YoY, fixed asset investments increased 5.7% YoY YTD coming in above expectations placed at 5.5% YoY while retail sales grew 8.6%YoY falling short of the median estimate of 5.8% YoY. Retail sales were decisively the weakest point we got today as it indicates that consumer spending slowed down last month compared to the same period last year. On the other hand, industrial output turned out to be strong, however, it was boosted by calendar effects (a working day more). Looking forward, China may still face some export difficulties (slower economic growth combined with duties pushing overseas prices higher) implying lower industrial production ahead.

WTI prices plunged on Tuesday touching the 61.8% retracement of the latest leg higher. Technically one may expect a slight rebound toward the 50% retracement. On the other hand, a resumption of declines could easily lead to $50. Source: xStation5

Japan’s economy affected by natural disasters

The Japanese economy contracted 0.3% QoQ (1.2% QoQ in annualized terms) in the third quarter after natural disasters hit spending and disrupted exports. Private consumption decreased 0.1% QoQ while business spending decreased 0.2% QoQ while exports fell 1.8% QoQ marking its fastest decline in more than three years. Note that in the past quarter every single GDP contribution (based on an expenditure approach) turned out to be negative. According to Japan’s economy minister Motegi weaker growth stemmed from natural disasters such as an earthquake and a typhoon, however, the US and China trade battle als contributed to weaker growth.

The Japan’s economy slowed down markedly in the three months through September mainly due to a set of natural disasters. Source: Macrobond, XTB Research

In the other news:

• Italy failed to resubmit a new budget till yesterday keeping spending targets rejected earlier by the European Commission

• Japanese industrial production fell 2.5% YoY in September

• US 10Y yields trades at 3.143% this morning, gold prices slightly above $1203

• German economy contracted 0.2% QoQ in the third quarter, the first decline since the beginning of 2015