MORNING CALL: Brexit Plan B | US Government Shutdown

Markets retrace from their highs as Chinese data disappoints, Sterling immune to Brexit plan B. Oil off from its highs 

Another day and another defeat, this is what Theresa May is suffering from. The Prime Minister had it in her face again yesterday when she suffered another loss in the House of Commons. May has completely lost control of the Brexit divorce, and the sad aspect is that she has no clue about the time table either.
In the coming few days, she is going to face another major defeat in the parliament when the Brexit deal will go for a vote in the Parliament. Given that her office is already preparing for the downfall moment, it shows the prime minister has no confidence in her deal any more.  The opposition leader, Jermy Corbyn is set to deliver a major speech on Brexit today and it is expected that he is going to call for general elections if the prime minister loses the upcoming week’s vote.
In terms of sterling, traders already priced all of this drama and hence we have not seen much of volatility creeping. Traders have already priced her defeat in the parliament. I think the chances of another referendum are high and it is likely that we may actually get another referendum and extension of the current Brexit deadline in order to deal with the situation.
All of this could be positive for Sterling. In the option’s market, traders have already started to place more bullish bets and the pound/dollar two-week risk reversal has climbed to a critical level, confirming the earlier statement. The last time we have seen this level for the two-week risk reversal was back in early January 2018, and at the time, the Sterling/dollar pair was trading above the 1.40 mark.
As for the ongoing US government shutdown situation, Mr Trump showed another sign of childish behaviour yesterday when he adjourned the meeting abruptly. The president stormed out of the meeting without any resolution on the US government shutdown and this pushed the US equity markets lower again. Remember, we have seen a major rally since Steven Mnuchin called the special meeting to restore the confidence and since that time, the S&P500 is up nearly 10%.
Market participants were most worried about four things; the US government shutdown, the slowdown in the Chinese economy, the trade war between the US and China. Finally, the Fed’s hawkish tone. It is by no mean any stretched statement that the Fed has become a prisoner of the markets. Time over time, they have learned that they need to pay attention to the market conditions and their policy cannot discount this important fact. The rout in the equity markets which we have experienced made it clear that the Fed needs to understand that investors do not like the idea of even one interest rate let alone two. Since then, the Fed policy members have watered down their hawkish tone.
Nonetheless, the U.S markets are still holding on to some solid gains for this year, the S&P is up by 3.12%, the Dow Jones by 2.36% and the NASDAQ by whopping 4.84%.
Crude oil prices have retraced from their highs breaking their 7 consecutive days of gain. The price has rebounded nearly 23 percent since it hit an 18-month low on Christmas Eve. Investors pushed the prices higher because of the increase in confidence around the production cuts by OPEC and then there was an element that the US-China trade talks are going in the right direction. As long as the major producers and their allies are committed in keeping the supply under control, we don’t think that there is anything to worry about. The price is likely to consolidate between the 47 to 55 mark.