Key Brexit votes today to drive sterling

Morning Note

Boris Johnson will seek to push through his Brexit deal with a vote on the withdrawal bill, 2nd reading, today. The numbers are tight, but No10 thinks it has just enough support to get it through. It would be a huge breakthrough as it would mark the first time MPs approving any Brexit deal. 

Risks/questions?

  • Can the government secure the 320 votes it needs? The hardcore of the ERG is on side this time but it’s still too close to call.
  • Will the government also secure MPs backing for the program motion required to get the bill through in record time? Opposition parties are angry about the lack of scrutiny. For me this is key risk as it would derail the Johnson juggernaut and require at least a ‘flextension’ – one that BJ has said he categorically will not seek.
  • Will MPs back a customs union and/or confirmatory referendum amendment? A confirmatory referendum is unlikely to win enough support, but would force the govt to pull the bill. The big doubt is whether the SNP might back an amendment to remain in the EU customs union, an idea they’ve previously backed. For the SNP though a no-deal Brexit they can blame on the Tories might be manna from heaven as they pursue their narrow separatist agenda.
  • If MPs do back either such amendment would the govt see this as a wrecking amendment(s) and pull the bill, likely calling also for an election? A customs union amendment would not affect the withdrawal itself and could be overturned at a later date.

All the while sterling is teetering at multi-month highs close to $1.30. GBPUSD was last trading down a touch around 1.29650.

If the PM fails the key vote on the Withdrawal Agreement Bill, sterling could get spun back to $1.25 in short order. If it passes, a breach of $1.32 and thence a push to $1.34 seem likely.

But there are yet -as detailed above – plenty of hurdles for the government to clear after winning the vote that will keep traders mindful of downside risks. The deal premium which has already added c7% to sterling would collapse quickly if the deal gets scuppered. That said, the market is right now quite confident that no-deal is not such a risk now as it was – this appears to be overconfident until the necessary votes are passed.

Meanwhile…US equities rose firmly yesterday amid a broad risk-on rally that saw the S&P 500 close at the highs of the day at 3,006.72. The Dow has a tougher time as Boeing shares fell again, but still managed to rally 0.2%. There seems to be some better vibes around US-China – not that I’d say there’s been meaningful progress, but comments from Trump and Kudlow were upbeat. In particular Kudlow’s suggestion that the Dec tariffs could be scrapped if talks in Nov go well is a clear positive. Meanwhile China’s vice foreign minister said today that progress was made in trade talks.

SPX is now just another day like Monday away from breaking it’s almost-time highs around 3028. With a slew of earnings this week we could see the bulls drive this one to a new top. We don’t have much in the way of macro eco data to get in the way. But this a key phase now as earnings multiples are by some measures very stretched. Eg 2020 forward Ev/Ebitda is the highest since Dec 2007. So I think we can weather the c-4% decline – what’s important is the guidance and I feel from today we will start to build up a fuller picture of Q4 and beyond. Chipotle, Kimberly-Clark, Hasbro, United Technologies, Harley Davidson, McDonald’s are among the big hitters reporting today.

That’s got, if we do get the ATH, the potential to knock haven assets like gold, bonds, the yen and even start to unwind haven dollar bids. US 10s are printing 1.8% once more.

Yesterday the FTSE struggled for momentum and clung to the 7160 area. Different story in Frankfurt where the DAX has cleared the YTD highs and can now look to take on the May 2018 swing high at 13,200. European equities are starting modestly lower despite the solid handover from the US and Asia.

Equities 

Bunzl says trading remains consistently sluggish, but in line with forecasts. Guidance for full-year 2019 is unchanged after reporting a decline in underlying revenues for Q3. Revenues grew 4% but only by 0.5% on a constant currency basis. Acquisitions remain the only growth lever, contributing 1.5% to this figure, while underlying revenues slipped 1%. Bit of a slowdown is to be expected at this point in the cycle for this kind of business. Acquisitions remain the important area – £100m so far committed this year but investors, unusually, may want more. Shares slipped over 1.5% in early trade.

Whitbread says it’s making strong progress in challenging markets. The company is struggling to make headway after selling Costa as it focuses squarely on an increasingly tough hotels market. London remains strong but it’s been harder going in the regional UK market. Total UK accommodation sales fell 0.6% and were -3.6% like-for-like due to the hit taken in the regions outside of London. Whitbread is one of those firms that for sure is hopeful that Brexit uncertainty lifts sooner rather than later.  

Germany is where the growth is though and on that front things are more optimistic with the German pipeline increasing 25% to 7,280 rooms. In fact management are accelerating the German programme of growth and scaling back the UK. Adjusted profits were down 4% to £236m. Adjusted earnings before interest, tax, depreciation, amortisation and rent fell 4.8%. So lots of short term uncertainty but longer term looking more solid – all eyes on whether it can drive growth in the key German market. Shares opened a shade lower.