A Brexit game of chicken

The UK took a sprint right in the direction of the EU via its Internal Markets Bill so now the EU will run straight back full pelt with a lawsuit.

Brexit trade deal

Chicken is not typically the animal of choice in financial markets - where bulls and bears are preferred. As such the British pound dropped on the news. The GBP/USD weakness coincided with its second failed attempt to break above 1.30 in as many weeks.


The drop in Sterling was not too dramatic since the EU had been quick to say they would turn to legal action after the internal markets bill was first leaked. The better mood music in the trade negotiations had led some to think the EU didn’t need the lawsuit - at least not yet.


So is a trade deal less likely now? We’re not convinced by the idea that good faith is needed to strike a deal in the case of Brexit. The opposing ideologies and political incentives were always going to make it acrimonious. If a deal does get done, it will be borne out of necessity and national interest- not out of a desire to be friends. A deal under most scenarios must be Sterling-friendly but a lot can happen in two weeks before Boris’ October 15 deadline.

 

Oil gets crunched

The price of oil took a big hit on Thursday with Brent and WTI crude futures sliding over 4%. If one were to look at just oil as a guide to economic expectations, things could be in for a turn for the worse.


A Reuters survey showing higher OPEC output through September complete countered the narrative that OPEC was turning the screw on non-compliant members. OPEC’s last interim meeting had made bold statements about a crackdown on compliance with leaks suggesting the UAE had taken a reprimanding from the likes of Saudi.


Without the small prospect of the tighter supply, we’re left with the deteriorating demand outlook brought on by higher coronavirus cases. Add in a risk-off mood across markets because of no US stimulus, Brexit and the US election and oil could have a tough Q4.

 

NFP Preview

This US jobs report could take on a little extra significance in the light of the big layoffs announced from Disney and possibly more to come from national airlines. Signs that jobs growth is petering out well below pre-COVID levels might be what’s needed to get pre-election fiscal stimulus.


From the standpoint of a new coronavirus stimulus bill, another solid jobs report could be problematic for markets. Stock markets stumbled in September when it became clear the CARES act wouldn’t have a sequel anytime soon. At the same time the dollar gained ground.


A good jobs report would logically see the dollar strengthen both as a reaction to the healthier US economic recovery and as a haven from disappointment that a stimulus bill isn’t around the corner. Expectations are for 850,000jobs gains in September - a moderation from the 1.37 million created in August. Look out for a number over the one million mark to cause some volatility.

 

Coming up…

Highlights = Australia retail sales, Eurozone CPI, Non-farm payrolls

 

Real Time Economic Calendar provided by Investing.com.

 

 

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