March 20, 2018

Markets Today: It ain’t over til it’s over

The UK and the EU have seemingly reached a transition deal that changes very little till the end of December 2020, when Britain goes it alone.

Today’s Podcast

As Phil Dobbie discusses with NAB’s Rodrigo Catril, it has no winning formula for the Irish border question.


  • US and EU equity sharply lower with slump led by the tech sector
  • The USD is mostly lower and GBP outperforms following Transition deal announcement
  • AUD underperforms most G10

EU and US equities have come under pressure overnight with the tech sector leading the decline. GBP is the G10 outperformer as the UK and EU unveil a transition deal draft while AUD struggles amid ongoing US-China trade tensions.

The technology led equity slump started during our APAC session yesterday following reports that Apple has made significant investment in the development of next-generation MicroLED screens. The news triggered a sell-off in OLED display makers in Asia. Then reports  from Europe suggested the European commission is planning to impose a 3% tax ( on gross revenue) on large digital companies operating in the EU based on where their users are located. Lastly, Facebook shares posted their biggest decline since 2015 ( 6.85% after an intraday low of -8.04%) as US and European officials demanded answers to reports that a political advertising firm (Cambridge Analytical) retained information on millions of the social network’s users without their consent. The later has raised concerns that politicians will investigate and eventually will aim to regulate the sector.

So the tech triple whammy of bad news has resulted in the NASDAQ losing 1.84% on the day with the S&P 500 (-1.42%) and Dow (-1.35%) not too far behind. All major European indices also closed in negative territory with the STX Europe 600 ending the day down 1.04%.

The other big news from the overnight session has been the joint UK-EU announcement that a transition deal has been agreed outlining the UK’s relationship with Europe after the triggering of Article 50 at the end of march 2019. The agreement defines the terms of the transition deal that will last for 21 months until the end of December 2020. So while this is a positive step, the deal still needs to be ratified by the 27 EU countries at a meeting on Friday and because the Irish border issue has not been resolved the document is not legally binding. So like Lenny Kravitz would say “It ain’t over til it’s over”, in other words nothing has been set in stone yet. The UK government of course has hailed the news as a great step and has told businesses there is very little (if any) risk here and that they can go and invest. Meanwhile, Mr Barnier, EU chief negotiator,  said the new draft legal text marks a “decisive step” but added that it was “not the end of the road”.

Looking at currencies performance,  the USD has given back almost all the gains recorded in the previous two days ( BBDXY -0.29% and DXY -0.44%) largely reflecting GBP and EUR outperformance following the Brexit/transition deal news overnights. Worth noting too that USD underperformance has occurred despite large overall short USD position and still tight USD liquidity. The 3 month Libor- OIS spread closed again above 50bps overnight ( At 50.6 bps after trading to an overnight high of 51.17bps)

So GBP is the G10 outperformer. Cable is up 0.62% over the past 24hrs and currently trades at 1.4029. Before the transition news the pair traded to a low of 1.3918 and after the news it reached an intraday high of 1.4088. The euro has also outperformed. Reuters reported that ECB policy makers are said to be shifting their debate to the future path of rate hikes. The report noted that policy makers were comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter. This has helped support EUR, alongside the positive news on Brexit negotiations. EUR traded to an overnight high 1.2359 and now trades at 1.2339.

Meanwhile AUD is little changed at a 0.7720 against a soft USD backdrop. Yesterday the pair traded to a low of 0.7687, the first time since Dec 21st it has trade sub the 77c mark. Commodities were mostly lower overnight, gold was up amid the risk-off tone in equities and iron ore and copper were the biggest losers, down -1.13% and -0.98% respectively. The AUD remains a risk sensitive currency with current concerns over the US-China trade tension suggesting the AUD/USD is probably the best G10 pair to express that view.

There has been no fresh news to drive US Treasuries and they seem to have found a bid as equity markets come under pressure.  The 10-year rate is down 1bp to 2.83% after earlier reaching as high as 2.88%. Rates should remain in a holding pattern until the FOMC announcement this week.

Coming Up

  • The RBA March Minutes is the main event on the Australian calendar today which also includes the weekly consumer confidence reading, house price index and RBA Bullock participation at an ASIC Forum in Sydney.
  • We don’t expect any surprises from the Minutes or RBA Bullock, we think both are likely to maintain the RBA’s recent narrative on the outlook for the economy and the labour market: the economy is improving, progress is being made on unemployment and inflation – but improvements will be gradual.
  • New Zealand gets the BNZ Performance of Service Index and  Q1 consumer Confidence reading. Later today the UK publishes its CPI readings and retail prices for February and the Zew survey (Mar) is out in Germany.

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