May loses closest ally

May’s Cabinet support draining away

Damian Green, British Prime Minister Theresa May’s de facto deputy and by far her most stanch supporter was forced to resign from Government yesterday as he was found to have lied to Parliament over the source of pornography found on his House of Commons computer.

The fact of his departure is far more significant that its reasons as it leaves Mrs May exposed to the more hard-line members of her team and removes one leg of her support mechanism. May has relied upon Green to ensure that the more hawkish members of the Cabinet understand that unity, at least in public, is the most sensible tactic given the parlous state of the Government’s minority status.

The effect of the news of Green’s departure won’t be felt until the New Year when discussions begin in earnest over the proposals for stage two of Brexit. Following the farcical situation that developed yesterday when the UK made a conciliatory gesture over financial services only to be slapped down by Brussels confirming that the UK would be excluded from the “financial passport”, means that the tone has been set for stage two of negotiations.

It is too early to tell the political ramifications of Damian Green’s departure but there is little doubt that May will be weakened as she tries to unify her Cabinet behind a soft-Brexit stance.

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Market too uninterested to provide verdict on Financial Services disagreement

It is hard to say what the reaction of the market would have been, had it been operating at full capacity, to the conflicting news from London and Brussels yesterday of conflicting financial services plans following Brexit.

The UK offered to allow EU banks to remain in London with no change to their status, a move that will save the likes of Deutsche Bank and Société Générale billions as they will not have to capitalize their branches into subsidiaries.

Meanwhile the EU set the tone for stage two negotiations by confirming that the UK wouldn’t have access to the single market as a holder of the financial passport which allows banks with operations in one EU member state to operate in all under a single regulatory body. It is almost as if it was hoped that this “shot across the bows” would pass under the radar but it could turn out to be significant not only of itself but also as a pointer to what can be expected when talks resume in March after an over long consultation period.

Traders shrugged off the news, treating it as an issue for 2018, almost accepting that despite the Government’s clear soft-Brexit stance, a hard-Brexit or no deal scenario is never going to be far away.

Sterling drifting as market winds down

The pound moved in a very tight range against the dollar yesterday and closed unchanged on the day. It drifted lower versus the single currency as it again bumped up against resistance only to be rejected yet again. The 1.1380 level is providing significant resistance although the downside is also well protected some way away at 1.1080. It is probable that these will the major points for the next eleven days (on only five of which the market will be open).

It is a similar story for the Euro and dollar. The Euro is struggling to break resistance at 1.1880 for both technical and fundamental reasons. Traders would like to buy the Euro but see a concern over U.S. monetary policy until Jerome Powell’s views are fully understood once he takes over as Chairman of the Federal Reserve. The Eurozone economy is growing, and inflation remains benign. However, the withdrawal of stimulus is not going to happen in the short term which is to the dollar’s benefit as interest rate differentials mean it is becoming more expensive to be short of the greenback.

Tomorrow sees the final major data release of 2017 as the final cut of U.S. Q3 GDP is revealed. It is unlikely to surpass the 3.3% that was announced a few weeks ago, but were there to be a surprise there could be a disproportionate response from, what will be by then, an extremely thin market.