Overview: The resignation of the UK’s Brexit negotiator after Prime Minister May had secured support from a majority of the cabinet sent sterling sharply lower. Raab’s resignation underscores the difficulty the Brexit agreement faces in the UK Parliament. Sterling was hammered nearly 2.5 cents on the news and trade below $1.28. British rates fell on the prospects of a separation without a divorce agreement. If the market hopes were dashed in the UK, there still is a “hope” trade around China. China’s formal response to the US trade demands spurred optimism that an escalation of trade tensions can be avoided. This still does not seem the most likely scenario and Chinese officials do not appear to have put anything new on the table. Asian equities were lifted by the optimism and the yuan gained on the dollar for the third consecutive session, the longest streak in three months. The US dollar is mixed.  Sterling’s drop has dragged the European currencies lower. Strong Australian jobs data and the trade optimism puts the Aussie on the top of the boards, though holding just below last week’s high (~$0.7305). European equities are mostly lower, with the Dow Jones Stoxx 600 off 0.4%, with consumer discretionary, materials, and energy resisting the pressure. Core benchmark 10-year yields are off three-five basis points, with 10-year Gilt yields off 12 bp. Peripheral European yields are three-five basis points higher, with Italy not leading the move today. Rate hikes in the Philippines (mostly expected) and Indonesia (surprise) have sent their respective currencies higher, though the volatile and accessible EM currencies, like the South African rand and Turkish lira, are also higher.  

Europe

Brexit is the main story today. There was a three-stage process and progress had seemed apparent. First, the UK and EC negotiators worked out the wording of an agreement. Second, Prime Minister May pushed it through the cabinet after a grueling five-hour meeting and following several resignations of her original cabinet including both wings of the party. The third is key: Parliament’s approval. The resignation of the Raab, the UK’s negotiator, is seen a clear indication that it will not pass Parliament. The Conservative Party is split and cannot count on Labour and other opposition parties to come to its aid. It is not clear the next step. There has not yet been a formal leadership challenge. The Tories ostensibly could topple the government in a confidence vote, but new elections would only add to the chaos. There is a push for a second referendum, but both the Tories and Labour party officials are opposed.