Europe Moves To The Center Ring

In recent weeks, the macro story focused on the shifting outlook for Fed policy and the Sino-American trade relationship.  There is unlikely to be further progress on either issue in the week ahead.  The Fed won't raise interest rates until toward the middle of the year at the earliest.  The government shutdown will limit new readings on the US economy.  US and Chinese officials just met.  Mid-level Chinese officials can easily sign-on to buy more US foodstuff and energy because they previously agreed to do this.  The more contentious issues will take further negotiations.  The next set of talks will take place at the end of this month when Chinese Vice Premier Liu He travels to Washington.

The focus in the week ahead shifts to Europe, and the outlook is not good. The protracted and painful UK exit from the EU is approaching a climax of sorts as the House of Commons will vote on the Withdrawal Bill.  Worrisome economic data from the euro will likely include softer inflation and recession-like drop in industrial output.

Despite the gestures, concessions, and threats, Prime Minister May appears unable to marshal a majority of the House of Commons to support the agreement struck with the EU.  The BBC projects that the government is facing a defeat of historic proportions.  It shows as many as 433 MPs will vote against the bill and 206 in favor of it.  One study noted that in the past century the government has been defeated by more than 100 votes three times and the largest margin was by 166.

This obviously increases the likelihood of a disruptive exit without an agreement.  It is not clear what happens next.  May has rejected a Plan B, such as a second referendum or postponement of leaving, in the face necessity, politicians have been known to blink.  The events market at has about a 20% chance that the UK leaves on March 29.    Pricing in the options market looks as if traders have pushed their expectations out as well.

Reuters reports that the two largest donors of Brexit, Hargreaves, and Odey, now fear that it will not take place at all.  The former expects that a delay will be implemented before a second referendum is called and the latter appears to have reversed his initial trading position is now playing sterling from the long side.  

Sterling rallied strongly ahead of the weekend.  It traded on both sides of Thursday's range on Friday against both the euro and dollar and closed above Thursday's high (outside day).  This bullish price action suggests market participants may be looking beyond the January 15 vote in the House of Commons.  Sterling closed at its best level against the dollar since November 22.  The nearby hurdle for sterling is about $1.2870, and a move above there can see an assault o $1.30.  

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Read more by Marc on his site Marc to Market.

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