Brexit Faces a New Hurdle

Daily Analysis - 04/11/2016

UK High Court Ruling Requires Parliamentary Vote to Trigger Exit, Sending Pound Higher

In a surprising turn of events, the UK High Court has ruled that a parliamentary majority must approve the triggering of Article 50 to exit from the European Union. Although the Government plans to appeal the decision, the move sets the stage for the referendum vote to be overturned by the House of Commons, sending Sterling higher as the risk of a “hard Brexit” falls.

Pound Soars on High Court and BoE Decision

Stunning financial markets, the UK High Court has handed down a ruling insisting that MPs must form a majority to approve any move to exit the European Union. Although the government has promised to appeal the ruling, with another hearing scheduled in December, the move significantly reduces the negotiating power of Prime Minister Theresa May’s administration. The kneejerk reaction in the Pound was to the upside as the decision could prevent an exit altogether if MPs from the House of Commons fail to find a majority in favor of exiting. Helping the Pound appreciate further versus peers was the subsequent decision from the Bank of England to maintain interest rates at 0.25% while removing language related to forward guidance for interest rates. With no further rate cuts forecast at this time, the Pound has further room to appreciate over the near-term.

European Unemployment Improves Modestly

In another sign that the aggressive monetary stimulus measures are benefiting the Euro Area economy, unemployment for the aggregate region printed at 10.00% in September, matching August’s figure which was revised lower from 10.10%. Although the figure has remained elevated above 10.00% for a significant period of time, the latest jobless figures show that the measure has improved to best level since June of 2011 when the sovereign debt crisis was in full swing. However, the incremental improvements in employment alongside inflation accelerating higher and stable growth are setting the stage for the European Central Bank to remove some of its accommodation. This could mean letting the ongoing asset purchase program expire in March 2017 as originally planned or even a slight amount of policy tightening during 2017. Nevertheless, the Euro is on the retreat versus the Yen as investors retreat to haven assets.

US Factory Orders Climb Back Into Positive Territory

For the first time in nearly 2-years, US factory orders rose on an annualized basis, climbing 0.60% from a year earlier. The monthly figure came in a better than anticipated 0.30% for September while August expansion was revised higher to 0.40%. These figures coincide with stronger manufacturing activity after both Markit and ISM released better than anticipated PMI results earlier in the week. However, despite the industrial recovery, the pace of services activity has tapered moderately, with the ISM non-manufacturing PMI slipping to 54.8 during October from 57.1 in September. The employment component of the PMI decelerated notably, potentially foreshadowing hiring challenges ahead of the nonfarm payroll figure due later in the session from the Bureau of Labor Statistics. In the meantime, softness in the US dollar has seen precious metals remain elevated, with gold prices retaking the $1300.00 per troy ounce level.

Seasonal Factors Keep Gas Under Pressure

After falling back below $3.00 per MMBTu earlier in the week, natural gas prices remain under pressure following another stockpile build. Data released on Thursday by the Energy Information Administration showed that US inventories grew by an additional 54 billion cubic feet last week following a 73 billion cubic foot build recorded a week prior. Due to seasonal factors, this is predominantly a period where stockpiles build due to less demand from utilities to satisfy energy needs and reduced heating requirements ahead of the winter months. As a result, natural gas prices typically experience a period of seasonal weakness in pricing as supply stays relatively constant just as demand dips. Further builds over the coming weeks alongside warmer weather conditions could continue to weigh on prices over the medium-term.