UK Stares Down A Rough “Brexit” Ride As Tension With EU Grows

Daily Analysis - 21/10/2016

UK Stares Down A Rough “Brexit” Ride As Tension With EU Grows

“Brexit” negotiations are raising more challenges for the UK as EU leaders’ demand that Britain continue accepting hundreds of thousands of migrants if it harbours any hopes of accessing the common market. This increases the likelihood of a hard exit, with the UK potentially losing single market access as it works to retake control of its sovereignty and borders.

EU Turning Openly Hostile Towards the UK

UK Prime Minister Theresa May faced a barrage of threats from her mainland counterparts as she arrived in Brussels to attend her first European Council meet. Both German Chancellor Angela Merkel and French Prime Minister Francois Hollande issued stern warnings to May that Britain faces a “rough” negotiation if she continues with her tough stance towards issues like enforcing a clampdown on immigration. The EC gathering comes at a time when European leaders are determined to push Brexit to the sidelines as they focus on tackling the renewed Russian aggression and the ongoing refugee crisis. In the meantime, despite the immense downward pressure on the Pound, the UK economy continues to steam ahead with inflation rising back towards targets as unemployment continues to trend at multi-year lows.

European Earnings Disappoint

A string of earnings from companies in Europe came in lower than expected, weighing on equity benchmarks across the region. Swedish truck maker Volvo AB reported a 015.00% dip in third quarter net profit, hurt by lower sales in all of its markets except Europe. Revenue fell -6.00%, with truck volumes, which account for about two-thirds of its total sales, declining -13.00%. Ericsson AB slumped to a third-quarter loss, as stiff competition from Asian rivals amid the continued slowdown in telecom-equipment market eroded sales. German luxury car maker Daimler AG was the lone bright spot, with profits for the three months ended September 30th coming in sharply higher, driven by robust sales of its new E-class sedans. Nevertheless, shares are coming under renewed pressure since the open of European trade.

Oil Down on Dollar Strength

Crude oil futures are down in early Friday trade amid a strengthening dollar and comments from Russia’s biggest oil producer that output could increase if demand spikes. Since oil is traded in US dollars, a stronger greenback results in higher cost for traders who hold other currencies. On the New York Mercantile Exchange, November crude futures fell to $50.36 per barrel in the Globex electronic session. Brent slipped to $51.17 per barrel on London’s ICE exchange. Oil prices have declined the past two sessions after hitting a one-year high on Wednesday. Investors remain cautious on the likelihood of a sustained rally in a market that is still grappling with supply uncertainties. Those concerns were reinforced by comments from Rosneft CEO Igor Sechin following remarks on Thursday that his country was prepared to raise production by as much as 4 million barrels a day if demand picks up.

Yuan at Record Low against Dollar

The Chinese Yuan plunged to an all-time low against the US dollar in Friday offshore trading after a slew of better than expected earnings from the Wall Street boosted the greenback’s strength. The dollar hit a high of 6.75651 against the Yuan, which is traded round the clock with Hong Kong being the biggest trading centre. Markets in Hong Kong are closed today as the city braces for a typhoon. The Chinese currency has been traded outside the mainland since 2010. The US dollar also rose to a fresh multi-month high against the Euro following indications from the ECB that it was open to extending its current monetary easing policies. The Euro slumped -0.20% to $1.0907, its lowest since March 10. From a technical standpoint, now that the lows of June 24 have been broken, the common currency looks set to drop further, potentially targeting the March 10th lows.