May Day is over

The Day So Far

The market has been in digestion mode this morning having seen one the biggest up days in GBP for 8-years yesterday following Theresa May’s speech on Brexit. The press has been littered with praise for the clarity provided by the PM and its knock on impact it had on the Pound but I remain sceptical. For one yesterday’s move can not be solely put down to the speech itself and actually in the context of what has been the bigger macro driver of recent weeks, it was the comments from President-elect Donald Trump, regarding the overpriced USD, that maybe the bigger story here. As outlined in my briefing it was this latter factor that already had GBP on the front foot and coupled that with the highest UK inflation reading since 2014 means, it’s not hard to see why Cable rallied so aggressively.

In summary, I am not taking anything away from the PM’s delivery which I actually thought was first class, but she is in essence talking her book. By that I mean that this is just 101 negotiation tactics and from a political point of view what other alternative does she have but to follow through on the commitment that Brexit means Brexit. I still believe that there will indeed be a Brexit but to believe that the final deal will maintain partial membership of the EU customs union, have continued tariff-free trade, and have an “implementation phase” is completely farcical. This in essence is purely a tactical play in my view in which I fully expect the more senior members of the EU to have little need to respond to until the actually triggering of Article 50 takes place. It is the period after the clock starts ticking that will be the most telling at to what the PM can truly pull off.

The Day Ahead

For the strategy today we have included an additional page for Cable so that we cover the most market moving instruments in addition to our core suite of products. With this in mind we see yesterday’s significant move in Cable as somewhat overdone given the reasons noted above and as such are looking at the short at the high from late yesterday which was at 1.2431. Meanwhile, our other short bias intra-day reside in T-notes, EUR/USD, and WTI crude. The logic here is that the USD will recover from the over 1%+ hit it took yesterday and as such US yields will also creep up; while in crude the drop this morning came amid no new fundamental catalyst so makes us feel more comfortable maintaining a short bias. As a reminder, due to the MLK holiday on Monday the API crude oil inventory data will be due later tonight with the DoE numbers bumped back to Thursday at the later time of 4pm. Finally, the one asset class that we remain more optimistic about is equities and in particular the S&P 500 given its apparent allergy to moving lower in the context of a robust US economy and incoming bullish Trump administration regarding fiscal policy.