US futures pared earlier gains, European stocks slumped and the pound tumbled after the Brexit crisis returned with a bang to the forefront after a series of British ministers quit in protest at Theresa May’s Brexit deal, plunging the U.K. government into crisis and sparking fresh fears about a May ouster and a hard Brexit.
Today’s turmoil started around 4am ET when Brexit Secretary Dominic Raab announced his resignation on Twitter, the highest profile of several departures on Thursday morning. “No democratic nation has ever signed up to be bound by such an extensive regime, imposed externally without any democratic control over the laws to be applied, nor the ability to decide to exit the arrangement,” he said in his resignation letter. His, and subsequent resignations, threw into doubt May’s ability to secure Parliament’s support for her plan and even to survive as leader.
Today, I have resigned as Brexit Secretary. I cannot in good conscience support the terms proposed for our deal with the EU. Here is my letter to the PM explaining my reasons, and my enduring respect for her. pic.twitter.com/tf5CUZnnUz
— Dominic Raab (@DominicRaab) November 15, 2018
The pound, which rebounded strongly on Wednesday after May announced she had won cabinet support for the withdrawal draft, tumbled 3 big figures almost instantly on the news, dropping as much as 1.9%, its biggest plunge since 2017.
“The reaction is sterling shows that the chance of no Brexit deal has spiked,” said Tim Graf, Head of Macro Strategy for EMEA at State Street Global Markets. “It also introduces thoughts of a leadership challenge (for British Prime Minister Theresa May) which seems likely now.”
While the prime minister defended her plan as the only way to protect the union of the U.K when addressing lawmakers in the House of Commons, the renewed threat that May could be replaced and Britain could crash out of the EU with no deal is an unpredictable and high-risk scenario for markets. As the resignations rolled in, the FTSE 100 Index trimmed gains as trading volumes soared to double the 30-day average while gilts surged. European stocks, which started the session in the green, pared all gains and dropped to yesterday’s lows, down 0.4%.
“The truth is no one can accurately predict how this will play over the next few days and weeks,” said Epworth Investment Management Chief Investment Officer Stephen Beer. “However, in some important respects, nothing has changed since the referendum. It remains the case that Brexit is likely to be economically worse for the U.K. than remaining in the European Union. What we have now is more people realizing that.”
S&P 500 had been solidly up before they pared much of their advance, although they have since rebounded to near session highs once more. The yen rose, and gold and the Swiss franc were steady, suggesting the market was not too concerned by the latest Brexit turmoil.
The S&P 500 had fallen for a fifth straight day overnight, with financial stocks hit by fears of tighter regulations once the Democratic Party takes control of the House of Representatives. U.S. stocks were also pressured by concerns that earnings growth might be peaking, trade tensions and a slowing global economy – factors that had triggered a rout in riskier assets in October.
The European turmoil followed a relatively calm Asian session with the MSCI Asia index rising 0.8%, as Hong Kong shares jumped after Tencent earnings beat expectations while Chinese equities rose 1.4%, cheering news that China and the United States were back in contact about their bitter trade disputeas after a report that Chinese officials had sent a letter to the White House outlining a series of potential concessions to the Trump administration, despite subsequent reports that the offering by China was insufficient to meet Trump’s demands. Japanese stocks edged lower while the Australian dollar jumped after a strong local jobs report.
There was some good news overnight: in a closely watched question-and-answer session late on Wednesday Federal Reserve Chairman Jerome Powell played down recent turbulence in equities, saying volatility was only one of many factors that the Fed takes into account. Then again, Powell’s admission confirmed that the Fed put is hundreds of points lower than the S&P’s latest price, which likely means that stocks have a long way to fall before Powell gets truly concerned about the Fed’s beloved “wealth effect.”
UK turmoil also boosted demand for safe-haven German government bonds. Ten-year Bund yields fell over three basis points to 0.36 percent, the lowest in over two weeks.
“While it’s difficult to pin-point a specific event for the risk-off move, recent themes appear to be keeping markets cautious include oil’s recent plummet, Apple’s fall, U.S. political gridlock, China’s slowing growth, tightening liquidity, a hawkish Fed, earnings peak, Italian jitters, and Brexit uncertainty,” wrote economists at ANZ.
Elsewhere, West Texas crude resumed its slide following Wednesday’s rebound from a record losing streak. Emerging-market shares rallied and their currencies strengthened.
“If U.S. stocks are to bounce back, economic indicators will be key,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo. “Focus will be on today’s U.S. retail sales data, which will provide a view of how private consumption -the main component of economic growth- is faring.” U.S. retail sales for October will be released today at 830am ET.
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