Latest Brexit plan sparks new political turmoil and sends the pound reeling; oil prices pull back sharply amid a glut in light crude supply; Japan's growth falters.
United Kingdom: Brexit Deal Sparks Renewed Volatility
On Tuesday, UK Prime Minister May signed off on a proposed Brexit deal with the EU that was ill-received even within her own political party; some believe it could fail to receive a majority vote in the House of Commons, the first step toward ratification by Parliament. Two senior ministers resigned on Thursday, which spooked the FTSE 250 index into an intra-day fall as high as 2.65% in the afternoon. Also, over the course of Thursday, the yield on 10-year UK Treasuries (gilts) fell from 1.46% to 1.36%. As a result, the only certainty on the nation's political and economic future appears to be more uncertainty.
Not surprisingly the flurry of news weighed heavily on the pound, which plummeted as much as 1.7% against the dollar on Thursday. Sterling’s monthly volatility against the U.S. dollar also spiked: while typically range bound between 5-10% over the past five years, it reached 15% on Friday. However, this is still a long way off the 28% volatility seen after the vote in favour of Brexit in June 2016.
Oil Prices: Long Rise, Sudden Fall
Crude oil saw substantial gains between its February low and October; a barrel of Brent crude, priced at $62 in mid-February, rose to a peak of $86 as of October 3rd, pushed higher by a combination of geopolitical risks, favorable supply-demand dynamics and U.S. sanctions against major oil producer Iran.
Yet most of those gains were lost over the next 5 weeks. By November 13th, it had fallen to $65 on the back of higher output from U.S. shale drilling, growing U.S. stockpiles of oil and forecasts of slowing demand due to weakening global economic growth. However, prices rebounded to $68 on Friday, over news that supply cuts are likely to be agreed at OPEC’s next meeting on December 6th.
Japan Growth: Two Steps Forward, One Step Back
After a strong 2nd quarter in which Japan's GDP surged at an annualized growth rate of 1.9%, its economy fell sharply to earth in Q3, contracting by an annualized rate of 1.2%.
Much of that can be traced to the one-off effects of some natural disasters (i.e. severe storms, earthquakes), which stifled domestic consumption and factory production. However, more worrisome was a 1.8% decline in exports vs the previous quarter, given the impact of trade tensions and tariff activity on major trading partners.
Against that backdrop, many expect the aggressive stimulus deployed by the Bank of Japan in recent years in the hope of sparking sustainable growth to continue. Data released by the Bank earlier this week shows that its holdings, swollen by 5 years of aggressive bond-buying roughly equal to the country's annual GDP.