All eyes will be on the Supreme Court today as they announce their verdict on the lawfulness of Parliament’s prorogation around 10:30 BST. Constitutionally the ruling is big, and could potentially redefine the boundaries of power between the executive and judiciary. For markets, however, the decision is rather ambiguous. Overnight volatility climbed a little, suggesting a minor bought of sterling strength is expected by investors following the decision. Sterling has refrained from moving much in the opening hours of today’s session, with the likely scenario of the Brexit process lingering in the forefront of the market’s mind. If the Supreme Court rules the suspension unlawful, the minor details will be pivotal. If it is deemed that PM Johnson misled the Queen through an improver motive then there would be calls for his resignation. An unlawful ruling citing that legislation was lost and parliamentary scrutiny were denied would be a softer blow for the government. Regardless, the scenarios are as follows. If the Supreme Court rules in favour of the government, then all is well and parliament will reconvene on October 14th. If it deems the suspension was unlawful, then the government has a few options. It could rearrange the Queen’s speech and re-open prior to October 14th, only to force through another alternative motion to suspend normal service, the government could find a more lawful avenue of suspending parliament all over again without reconvening MPs, or normal service resumes. Nevertheless, the repercussions for PM Johnson and the likely Brexit scenario that will ensue are key for markets and sterling that keeps relentlessly pricing no-deal probabilities.
Yesterday’s PMI readings in Germany all but confirmed the Eurozone’s largest economy has slipped into a technical recession in Q3 following negative growth in the second quarter. The manufacturing PMI showed the sector contracted for the whole of 2019 thus far and at the fastest rate yet. The composite PMI, which measures the average growth of Germany’s industries fell into negative territory for the first time since 2016 and marked that a contraction in GDP in Q3 was all but confirmed by the official figure. The service sector failed to lift up the composite this time around, evidencing the broad-based nature of Germany’s economic contraction. The service sector PMI fell from 54.8 to 52.5 in September. The Eurozone composite PMI didn’t provide much hope for euro-based investors either, sitting just above the growth threshold at 50.4. The fact the chief of the Markit PMI report cited the broadening nature of the economic slowdown is worrisome. This was reflected in EURUSD that took another leg lower to resume trading in territory not seen since 2017.
Fedspeak dominated the US news flow yesterday with both the New York Fed President John Williams and St Louis Fed President James Bullard speaking. Williams’ speech focused around US dollar liquidity in overnight lending markets, which has drawn much attention after short-term lending rates for financial institutions spiked last week after a series of transitory events lined up. Williams, the head of the Federal Reserve that partakes in Open Market Operations, said the Fed will need to assess when it is wise to resume balance sheet growth – building from Powell’s comments at the latest Fed meeting about “natural” growth of the balance sheet. Fed purchases are a solution to providing liquidity in the primary dealer market, but for now, the New York Fed will continue to provide it with daily auctions until mid-October. Elsewhere, perma-dove Bullard said the Federal Reserve may have to cut rates further to offset the downside risks from trade conflicts and too-low inflation. This morning, news hit that US-China trade talks will resume next week, while it is reported that Chinese companies received waivers for 2-3m tonnes of US soy.
The loonie got thrown around by the swing in oil market’s yesterday as concerns of the global slowdown re-entered the market’s focus following German and Eurozone data. WTI crude finally settled marginally higher on the day, but the damage was already done for the loonie which closed partially lower. Safe-haven flows benefitted the US dollar broadly against risky currencies yesterday.