New Threat Emerges to UK Exit

Analisi Giornaliera - 27/02/2017

Scotland Pushing for New Referendum


Just as the House of Lords is set to begin its review of the proposed exit measures being taken by the government before giving final approval necessary to proceed with the EU divorce, there are reports that Scotland is preparing for another independence referendum in a move that has already weighed on the Pound.

Pound Slips on Scottish Referendum Fears

Although there is already an abundance of uncertainty throughout European politics, the latest referendum developments underway in Scotland could complicate the Brexit outlook.  After calling an independence referendum in 2014 which resulted in the majority of Scots voting to stay in the United Kingdom, the Pound has fallen upon reports that Scotland plans to call a new referendum in March.  This coincides with the review being conducted by the House of Lords before approving the Government’s ability to trigger Article 50 and begin exit negotiations.

Besides complicating the Brexit outlook, it highlights the frayed relations between the country’s regions as the proposed exit initiation date rapidly approaches.  The immediate reaction was a steep selloff in the UK Pound, with GBPUSD falling as much as 80 pips before recovering modestly back above the 1.2400 level.


Operational Drill Rig Count Rises Further

Further evidence that US crude oil production is set to rise over the medium-term came in the form of continued gains in the US drill rig count delivered by Baker Hughes on Friday.  According to the report, the number of active oil rigs totaled 602 last week after rising by another 5 to mark the sixth straight week of gains for the figure.  This accompanies US oil production which managed to top 9.000 million barrels per day last week.  Nevertheless, after retracing all the EIA inventory announcement gains on Friday, oil prices are slightly higher since the reopening as tensions between the Gulf States and Iran rise.

Over the weekend, Iran launched war games at the opening of the gulf and within the Indian Ocean.  Furthermore, as the CFTC reported on Friday, bullish crude positions reached the highest point on record, driving additional gains in prices.


European Imbalances Reach 2012 Levels

In a reflection of the deteriorating outlook in some European core and periphery states, TARGET2 payment imbalances have recently reached the highest point since 2012.  Chiefly behind this development has been the exodus of funds from countries like Spain, Italy, and Greece.  This accounts for Germany’s concerns when it comes to Greek negotiations over the next tranche of bailout funds.

At present, Germany is owed nearly €800 billion by Euro Area peers, underscoring its unwillingness to negotiate with borrowers as it could set a bad precedent in the event that a member state decides not to pay its bills or leave the Euro Area. Adding to the headaches facing investors is the dynamic political landscape which continues to favor anti-establishment, populist politicians from the right side of the spectrum.  Although slightly higher on the session, the EURUSD pair remains in the downward trend of the last month.


US Equities Reach New Heights Despite Home Sales Miss

Extending the recent winning streak, US stock indices are higher after the weekly reopening despite the shakier fundamentals displayed in the housing market last week.  Friday’s new home sales data missed expectations of a 570,000 annualized pace of sales, instead printing at 555,000 while the prior figure was revised lower to 535,000.

Despite existing home sales managing to beat forecasts earlier last week, real estate figures continue to underline the unevenness of activity in the housing sector.  Although home sales have not faced the decline expected following the move to raise interest rates in December, further rate hikes could dissuade buyers if mortgage financing costs continue to climb over the medium-term.  In the meantime, the S&P 500 continues its 6-session climb, with futures rising to a new record in early Monday trade.


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