- Markets wait for word on EU’s Brexit extension and prospects for UK election
- China announces more soybean waivers ahead of Friday’s US/China high-level telephone talks
- ECB President Draghi likely to sign off quietly with no action today
- U.S. economic reports expected to be weak
- 7-year T-note auction to yield near 1.68%
Markets wait for word on EU’s Brexit extension and prospects for UK election — EU officials on Wednesday indicated that an EU decision on a Brexit extension is likely on Friday. The most likely outcome is a “flextension” until January 31, which means that the UK could leave the EU before Jan 31 if it completes the necessary legal work. However, French President Macron threatened to force a shorter extension, such as only until November.
If there is a short extension until only November, then there would not be enough time for UK elections. However, if the extension is set to January 31, then there would be enough time for an election. The question would then become whether UK Prime Minister Johnson would push for a new election and whether the Labour Party would agree. Labour leader Corbyn would have little justification for opposing an election since his mantra has been that the Labour Party only opposes new elections when there is an imminent threat of a no-deal Brexit, which would not be the case with a new Jan 31 deadline.
Meanwhile, the Conservative Party is sharply split on whether to call a new election. The argument against a new election is that PM Johnson should simply get Brexit done now while there is a majority in Parliament that agrees with his deal. After successfully executing Brexit, Mr. Johnson could call an election later in 2020 with a Brexit triumph in his pocket. The main argument against having an election now is that the new Brexit Party could steal a significant number of seats from the Conservatives and result in even fewer Conservative seats in Parliament than there are now.
The only real argument in favor of having elections now is if Mr. Johnson thinks he can do very well in the election and come out of the other side with a solid majority that makes passage of his Brexit deal even easier. However, that would be a very risky play.
The markets would prefer the least risky option, which would be for Mr. Johnson to steam ahead now for a final deal before January 31. Once a Brexit deal is done and the UK is in the quiet transition period, then the markets would be much less worried about the uncertainty involved with a new UK election.
By contrast, if Mr. Johnson calls a new election for early December, there would be a great deal of market uncertainty since the prospects for Brexit would depend on the outcome of the election. There might no longer be a Parliamentary majority in favor of a Brexit option and the markets might return to a threat of a no-deal Brexit. Also, if the Labour Party were to unexpectedly win the election, then a whole new Brexit deal would have to be negotiated with the possible additional uncertainty of a public referendum on any final Brexit deal.
Sterling on Wednesday consolidated mildly below Monday’s 5-month high and closed the day +0.31%. The betting odds on Wednesday for a no-deal Brexit on Oct 31 fell to a new record low of 6% (16/1) at oddschecker.com.
China announces more soybean waivers ahead of Friday’s US/China high-level telephone talks — China on Wednesday announced tariff waivers for the purchase of another 10 million metric tons of U.S. soybeans by state-owned and private Chinese companies. That should help smooth the way for the ongoing talks to finalize the phase-one trade agreement.
USTR Lighthizer on Monday said that there will be high-level telephone talks on Friday among himself, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu. The two sides are trying to finalize a written deal to be signed by Presidents Trump and Xi at the upcoming APEC Summit in Chile on Nov 16-17.
ECB President Draghi likely to sign off quietly with no action today — The markets are not expecting the ECB at its policy meeting today to make any policy changes since the ECB at its last meeting in September already announced a dramatic easing move. The ECB in September cut its deposit rate by -10 bp to -0.50%, announced the restart of its QE program at 20 billion euros per month beginning Nov 1, and announced easier terms for its long-term TLTRO loan program for banks.
The market consensus is for ECB policy to remain unchanged in the coming months with a possible -10 bp rate cut by mid-2020. According to a recent Bloomberg survey, the market is not expecting the ECB to end its new QE program until Q3-2022 and is not expecting the first rate hike until Q4-2022.
U.S. economic reports expected to be weak — Today’s U.S. economic reports are expected to be weak and fuel angst about the U.S. economy. The consensus is for today’s Sep durable goods orders report to show a decline of -0.7% m/m and -0.2% ex-transportation, and for Sep core capital goods orders to fall -0.1% m/m. Today’s Oct Markit U.S. manufacturing PMI is expected to show a decline of -0.2 points to 50.9, although the services PMI is expected to edge higher by +0.1 points to 51.0. Today’s Sep new home sales report is expected to show a decline of -1.6% to 702,000 after Aug’s increase of +7.1% to 713,000.
7-year T-note auction to yield near 1.68% — The Treasury today will sell $32 billion of 7-year T-notes, concluding this week’s $133 billion T-note package. The benchmark 7-year T-note on Wednesday closed at 1.68%, which is just mildly below Tuesday’s 1-month high of 1.71%. The 12-auction averages are: 2.49 bid cover ratio, $18 million in non-competitive bids, 4.5 bp tail to the median yield, 30.9 bp tail to the low yield, 43% taken at the high yield, and 59.6% taken by indirect bidders (exactly matching the median for all recent coupon auctions).
