Morning comment: Aussie & French sentiment & more Brexit votes

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
The ‘weak China’ narrative continued in US markets on Monday with disappointing earnings reports from Caterpillar and Nvidia – both citing weakness in Chinese demand – causing these stocks to close down over 9% and 13% respectively. Meanwhile, ahead of Wednesday’s trade meetings, worries about US/China relations were reinforced by news that the US Justice Department had issued criminal charges against China’s Huawei (including CFO Meng Wanzhou) citing alleged bank fraud in connection with businesses in Iran (separately the company has also been accused of stealing trade secrets). At the close the S&P500 was down 0.8%, paring almost half of the losses that had been seen in early trade and broadly matching the earlier decline in the Euro Stoxx 50. US Treasury yields fell 1-2bps while credit spreads moved slightly wider.

In a quiet day for data in Asia, regional bourses initially took their lead from Wall Street with solid losses recorded in most markets. However, as was the case in the US, morning losses were pared in afternoon trade. Indeed after being down as much as 0.9%, Japan’s TOPIX clawed its way back to close with a modest 0.1% gain, while modest gains were also seen in China and South Korea. By contrast stocks ended lower in both Singapore and Australia, with the latter not helped by a very disappointing business survey (more on this below). JGBs were unsurprisingly little changed while moves in the yen and dollar were limited.

So, far this morning, most European government bonds are a touch higher despite a slightly better French consumer confidence survey. But sterling remains stable, close to $1.315, ahead of this evening’s votes in the House of Commons on a range of options to try to influence the way forward on Brexit. There are risks that all proposed amendments might be rejected, which would reaffirm the vacuum in policy just two months before Brexit Day. By the same token, however, certain constructive amendments tabled by backbenchers – not least one that would demand that May seeks an extension of the Article 50 deadline in the event that no agreement is reached by late February – might yet gain majority support.

UK:
So, all eyes in the UK today will be on this evening’s Brexit votes in the House of Commons. Theresa May’s strategy was revealed last night when she sought to persuade Conservative MPs to back an amendment, tabled by Tory backbencher Sir Graham Brady, which would endorse her deal subject to negotiating alternative arrangements to avoid a hard border in Ireland in place of the current draft backstop agreement. Of course, the EU has long made clear that it has no intention to renegotiate the backstop, or anything else in the Withdrawal Agreement. Moreover, it’s already evident that, if it is selected for a vote, the Brady amendment will face defeat. Certainly, several notable Brexiters of the ERG are refusing to back it, thus revealing (as we might have guessed) that their support cannot be bought simply by tweaking the backstop. Assuming the Brady amendment is indeed selected for a vote, however, the magnitude of defeat could be instructive as to what might be required if a version of May’s deal is eventually to make it through the Commons.

Other key amendments tabled include that of Labour’s Yvette Cooper and the Conservative Nick Boles, with plenty of additional cross-party support, which would demand that the Government requests from the EU27 an extension to the article 50 deadline, of up to nine months, if Parliament has not voted in favour of a negotiated deal by late February. If that is approved, May would find it politically difficult to resist, and so market expectations that a no-deal Brexit will be avoided might be expected to rise further. Alas, in the absence of unanimous support from the Labour frontbench – whose strategy is still unclear – the Cooper-Boles amendment might also be expected to fail to find a majority.

The same could apply to a further constructive amendment, tabled by the Chair of the Brexit Select Committee, Labour’s Hilary Benn, to facilitate a series of ‘indicative votes’ to test parliamentary support for a range of possible Brexits, from no deal, to Canada- or EEA-style relationships, and indeed a second referendum. At the same time, a new set of proposals that emerged last night from a mix of extreme Conservative Brexiter and remain-supporting backbenchers, that claims to set out new options but is based on widely discredited IEA work that has long been rejected by the EU, looks a complete non-runner.

Indeed, given the extent of divisions within the House of Commons, it cannot be ruled out that none of today’s votes will find majority. If so, May might be expected to ignore everything that happens this evening, and seek to plough on regardless, letting the clock run down further and pledging to come back in the middle of February with a new proposal.

Euro area:
It should be a relatively quiet day for economic news from the euro area, with the most notable new release – the French INSEE consumer confidence survey for January – out already and thankfully better than expected. Of course, French consumer confidence took a sharp turn for the worse last month when the Gilets Jaunes protests stepped up a gear. And while the mass demonstrations have continued this year despite President Macron’s concessions, this morning’s INSEE survey suggested that consumer sentiment has improved somewhat this month. The headline index rose 5pts on the month, returning to November’s level of 91. That, however, is still a downbeat reading, being 13pts lower than a year ago and 9pts below the long-run average.

In terms of the survey detail, the major indices for consumers’ assessment of personal finances and the overall standard of living in the country improved notably. Likewise, the share of households considering it a suitable time to make major purchases rose sharply. But that index was also still a long way below its long-run average. And consumers’ assessment of the labour market deteriorated further, with unemployment fears continuing to rise. So, despite the improved headline figure, overall French consumers appear to remain quite downbeat. And we certainly do not expect consumer spending to provide significant support to French economic growth this quarter.

US:
In the US, uncertainty remains as to when the data postponed on account of the shutdown will eventually see the light of day. But today will still bring the release of the Conference Board’s latest consumer confidence survey as well as the S&P Case Shiller home price index. In the markets, the Treasury will sell 7Y notes and 2Y floating-rate notes.

Australia:
The main domestic focus today was on the release of the NAB business survey for December, which indicated that Australia has not been immune to the decline in sentiment reported in many other countries in recent months. While the headline business confidence index was steady at +3, the more closely watched business conditions index plunged 9pts to +2, marking the lowest reading since September 2014 and leaving the index now slightly below its long-term average. Within the detail the employment index fell 5pts to a 2-year low of +4, while both the trading index and capex indices fell 8pts to +7. Perhaps surprisingly, there was little change in the indices measuring the sentiment of exporters.

Finally, ahead of tomorrow’s Q4 CPI report, respondents reported that output prices had increased just 0.3% across the past three months, marking the weakest reading since July last year. Not surprisingly these results have left the market of the opinion that there is a non-negligible risk that the RBA could ease policy settings later this year – an opinion that will likely become more widespread should tomorrow’s CPI report reveal a second consecutive large undershoot of the RBA’s forecasts for underlying inflation.

New Zealand:
New Zealand reported a merchandise trade surplus of NZD264m in December – a slightly better-than-expected outcome due to a modest shortfall in imports compared with market expectations. After allowing for usual seasonal effects this equated to an underlying deficit of NZD155m, marking the best outcome in twelve months. The full calendar year deficit stood at NZD5.9bn – in nominal terms the largest since 2007 (although as a proportion of exports, the current deficit equates to 10%, compared with 17% in 2007). Exports rose 3.2%Y/Y in December, whereas imports rose 6.6%Y/Y.

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