Diverging Brexit Scenarios Send Pound Down After Whipsaw Session
The pound fell in Asian trading as investors started to weigh a worst-case Brexit after Prime Minister Theresa May’s plan was roundly defeated by U.K. lawmakers.
Sterling weakened against most its Group-of-10 counterparts, while traders said flows were thin as most investors were staying on the sideline after Tuesday’s whipsaw session. While May is expected to survive a vote of no confidence that will take place on Wednesday, uncertainty over how she will put together a new deal is spurring risk aversion.
“Tuesday night’s vote may have increased the chances of a second referendum but it also increased the chances of a no deal Brexit,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “Both tails are now a bit fatter and GBP volatility has risen accordingly.”
The pound dropped 0.1 percent to $1.2848 as of 12:50 p.m. in Tokyo after sliding as much as much as 1.5 percent on Tuesday before erasing all those losses. Sterling was little changed at 88.73 pence per euro.
The U.K. currency’s volatility is rising again as traders brace for Wednesday’s confidence vote that was tabled by Labour leader Jeremy Corbyn. One-week implied volatility climbed 0.76 to 14.6450 after dropping the most in almost month on Tuesday. One-month volatility increased 0.17 vol to 13.025.
The pound has weakened almost 14 percent since the day before the U.K. voted to leave the European Union in June 2016 amid concern the departure would hurt its economy. Bank of England governor Mark Carney has said a no-deal outcome may lead to a quicker pace of interest-rate increases to control inflation.
The opposition Labour party says all options, including campaigning for a second referendum, remain on the table if there isn’t a general election. That would be the best case for sterling, boosting the currency to $1.35, according to a survey of analysts. Leaving with no deal would see the pound drop to $1.15.
“While markets see a delay to Brexit as a tactical buy for the pound, politicians in the U.K. and the EU are not underestimating the risk for a disorderly Brexit”, Philip Wee, a foreign-exchange strategist in Singapore, wrote in a research note.
All clear or keep clear? Turkey’s lira still vulnerable
Having suffered its worst year in nearly two decades in 2018, Turkey’s lira was earmarked by many as the “comeback kid” of this year – with local policymaking getting the benefit of the doubt at last and global currency markets calming.
But January so far has proved a far more uncomfortable affair.
Turkey’s toxic cocktail of regional political tension, domestic governance worries and monetary and fiscal policy uncertainty continues to frustrate any attempted rebound.
And the hangover from the 2018 currency collapse has still to hit the local economy with full force, testing the central bank’s resolve in being able to keep interest rates at current punitive levels to defuse the lira-fueled inflationary surge.
Rising tensions with its NATO ally, the United States, fears that the central bank could cut rates too early – it meets for the first time this year on Wednesday – and a government willing to loosen the purse strings in the run-up to municipal elections in March have seen the lira underperform its peers.
“If the market concerns subside in the coming days, then maybe the lira would stabilize as well, but I think what is more important is the continuation of these factors, and some of them will be with us clearly for the time being,” said Inan Demir at Nomura.
Stock Market News
Day Ahead: Top 3 Things to Watch
1. BofA and Goldman on Tap to Report
Financial sector earnings continue tomorrow before the bell, with Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) highlighting the reports.
For BofA, analysts are looking for a profit of 63 cents per share on revenue of about $22.4 billion.
On average, analysts expect that Goldman Sachs earned $4.42 per share on revenue of about $7.6 billion.
JPMorgan Chase (NYSE:JPM) managed to close higher today despite missing on the top and bottom lines as the financial sector closed higher.
2. Another Drawdown in Crude Stockpiles Seen
Crude oil bounced higher today and could be in for more gains if there’s another decline in U.S. oil inventory data.
The U.S. Energy Information Administration is expected to announce tomorrow a sixth-straight weekly decline in oil inventories for the week ended Jan. 11. Analysts forecast a drop of 1.3 million barrels.
In its Short-Term Energy Outlook released on Tuesday, the EIA forecast Brent will average $61 per barrel in 2019 and $65 in 2020, versus the 2018 average of $71.
The EIA expected WTI to average $8 per barrel below Brent in the first quarter. It saw the discount narrowing to $4 by the fourth quarter through 2020.
3. Beige Book Arrives
With trillions on its balance sheet, the Federal Reserve doesn’t have to worry about a lack of funds due to the partial federal government shutdown.
The Fed will release its Beige Book assessment of economic conditions at 2:00 PM ET (19:00 GMT).
The information will be useful for Fed Heads who parse every page. But it would take a major surprise to shake the current thinking that the Fed will remain mostly on hold this year after all the recent information from the Fed minutes and public remarks by Chairman Jay Powell.
The chances that the FOMC will keep rates steady through October increased today, according to Investing.com’s Fed Rate Monitor Tool. That’s likely due to an unexpected drop in the December core producer price index, which eased inflation expectations.
JPMorgan misses fourth-quarter profit estimates as bond trading slumps
JPMorgan Chase & Co (JPM.N) missed profit estimates for the fourth quarter as a slump in bond trading revenue overpowered strong consumer loan growth and record revenues.
It was the first time JPMorgan Chase, the largest U.S. bank by assets, has underperformed earnings-per-share expectations in 16 quarters, according to Barclays equity analyst Jason Goldberg.
JPMorgan was the second large U.S. bank to point the finger at choppy markets in December for its bond revenue losses. Citigroup Inc (C.N) on Monday posted a sharp drop in fixed income revenue, blaming widening credit spreads, or the premium investors demand for holding corporate bonds over safer U.S. Treasury securities.
Goldman Sachs (GS.N) and Morgan Stanley (MS.N), which report earnings later this week, are likely to say they experienced the same effects in their large fixed-income trading businesses.
Well Fargo & Co (WFC.N), which relies less on trading, said on Tuesday that fourth-quarter revenue missed expectations as revenue across all its banking units declined, especially at community banking.
Despite an 18 percent drop in JPMorgan’s quarterly fixed-income revenue, Chief Financial Officer Marianne Lake said one down quarter does not make a trend.
“The outlook for growth in the economy is still strong,” she said on an analyst call. “The consumer is still strong and healthy. We are expecting to see maybe slower but still global growth going forward.”
Bitcoin Falls as South Africa Mulls Tighter Regulations
Bitcoin and other major digital coin prices dropped on Wednesday in Asia, after a mild recovery the day before. News on crypto regulations continued to be in focus, with South Africa’s central bank calling for tighter oversight as digital assets could be linked to criminal activity.
Bitcoin, the world’s largest digital coin, lost 1.81% to $3,577.4 by 12:58 AM ET (06:58 GMT).
Ethereum slid 6.59% to $119.4, XRP was down 1.86% to $0.32346, and Litecoin dropped 3.66% to $30.767.
On January 15, the South African Reserved Bank proposed tougher regulations, instead of a ban, on cryptocurrencies. The bank published a consultation paper to solicit opinions until February 15.
“In order to achieve anti-money laundering/combating the financing of terrorism (AML/CFT) requirements, more specific requirements will be necessary in line with the recent amendments to the Financial Action Task Force (FATF) Recommendations,” the paper read, adding that “regulatory action should not be delayed.”
The move came as FATF, the global money-laundering regulator, is expected to release rules on the oversight of cryptocurrencies by June 2019.
In South Africa, the proposed rules require all cryptocurrency asset trading platforms, custodial service providers, and payment service providers to register with the authorities and comply with the AML/CFT provisions of the Financial Intelligence Centre Act.
Cryptocurrency service providers should also monitor user transactions, especially large transactions that could be related to terrorism.
With that said, South Africa currently has no plans to ban the buying, selling or holding of crypto assets, or crypto assets for payments.
Although regulators worldwide have expressed concern about the potential use of cryptocurrencies for criminal activities, authorities in the Marshall Islands seem to be undeterred.
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