Pound sinks on Brexit vote, as markets look to Fed

By Michael Hewson

European markets opened slightly higher this morning, with the DAX lagging, while the FTSE 100 has outperformed, helped by a weakening in the pound overnight as well as firmer oil and copper prices.

Stocks in Asia underwent a cautious session ahead of the start of today’s US China trade talks, amid tension over the criminal charges being levied against Huawei, by the US Department of Justice.

Apple’s results overnight were somewhat of a mixed bag, with big declines in iPhone sales and revenue, which was combined with further weak guidance on Q2 revenue.

Markets still seemed to like the numbers with services being a particular bright spot, with continued growth in that area, driven by much higher margins; however, even if services continues to outperform, the average price point for this area is still much smaller than for devices. As such it is optimistic to suggest it will compensate sufficiently if iPhone sales continue to slow, given that they account for 62% of overall revenue.

On the earnings front Siemens reported Q1 numbers that missed expectations, with revenue coming in at €20.1bn, below expectations of €20.47bn, as profits declined across all areas of the business, with power and gas a particular weak spot. Management did reconfirm the outlook for 2019.

For months now we’ve struggled to determine if there were any Brexit option that MPs in the House of Commons could coalesce behind. That picture did become a little clearer last night despite MPs voting down the cross party Cooper/Boles amendment to extend article 50, which markets had broadly assumed would gain a majority, given recent gains in the value of the pound.

As with the Brexit vote back in June 2016 market expectations proved to be somewhat wide of the mark and the pound slipped back sharply, however the falls were tempered by a non-binding amendment which did gain a majority that rejected the prospect of the UK leaving the EU without a deal.

The margin was still close, 318 votes to 310, and it is this vote that the EU are likely to focus their attention on when Prime Minister May heads back to Brussels, after gaining a welcome boost from MPs by winning another vote that pledged to reopen the withdrawal agreement and discuss the contentious Irish backstop, which has caused much consternation among Brexiter MPs.

EU officials have already poured cold water on any attempt to reopen the agreement, which suggests that the UK will struggle to extract any meaningful concessions from Brussels, however the EU won’t now be able to claim that they don’t know what British MPs want, given that the Brady amendment was passed by 317 votes to 301.

The wider issue is that we still don’t really know what Brexiter MPs would be able to swing in behind if the UK is able to get concessions and therein lies the problem. The EU’s response to last night’s events has thus far been fairly unequivocal, but the fact remains that ‘no deal’ is still on the table, and while MPs have said they don’t want a ‘no deal’, the margin was still quite tight, which means that the prospect of a compromise still remains a possibility.

There are those who say that the EU will remain firm in their insistence that the agreement cannot be changed, but then the EU also said they would never bail out Greece and we all know what happened next. The stakes just got raised further in this high stakes game of poker, with MPs set to have another debate on 13 February.

US markets closed somewhat mixed yesterday ahead of today’s FOMC rate meeting. There aren’t expected to be any surprises from today’s decision, with no changes expected, though there will be a press conference which should give a useful insight into how much the Fed’s thinking has shifted since the December decision to raise rates.

The recent government shutdown is likely to play into any caution Fed chairman Jay Powell has about the US economy, and he can expect some tough questioning about the conflicting signals he has given out in recent weeks, as well as what plans the Fed has with respect to balance sheet reduction as well as the timing and pace of future rate rises.

The earnings story also continues this evening with the release of the latest numbers from Facebook, as the company continue to find itself at the centre of various media storms, this time over content on Instagram. It’s a continuation of a wretched 18 months for the social media giant, also caught up in fake news headlines along with concerns over data privacy issues and tracking of users’ browser history, the company has also had to contend with new EU GDPR rules.

This has raised concerns that the brand is becoming tarnished, as users drop away, a view that isn’t helped by CEO Mark Zuckerberg’s somewhat aloof demeanour when it comes to accounting for the company’s actions. Its margins have also been shrinking, due to higher costs, which doesn’t help the top line and the share price plunge since last summer has been painful for shareholders. Profits are expected to come in at $2.19c a share.

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