European open – Brexit deal, Italy budget and oil

All eyes on 2pm UK cabinet meeting as May secures Brexit deal

It promises to be another interesting and potentially volatile day on Wednesday, with Brexit, the Italian budget, Sino-US trade and oil markets all battling for the spotlight.

After more than a year of negotiations and days of intense talks to get a deal wrapped up in time for an emergency EU summit this month, it was reported on Tuesday that Theresa May has come to an agreement with the EU and will seek the support of her cabinet on Wednesday, something that initially sent the pound soaring.

The pound quickly lost its spark though as a long list of politicians – that have been very vocal on the negotiations over the last 18 months – cast doubt on the ability of the reported deal to get through parliament and in some cases vowed to vote it down.

This was always likely to be the harder sell for May and the next month will be her most challenging so far but she’ll be confident that what she has appeases enough people to get it over the line. Whether it truly delivers on the referendum, protects the integrity of the United Kingdom and averts an economic shock is another matter entirely and will determine its success. The alternative though could be chaos.

Aussie eases as wage growth equals a four-year high

Rome risks stand-off with Brussels

Italy called the European Commission’s bluff on Tuesday, re-submitting the draft budget without any changes to its 2.4% deficit target or its 1.5% growth targets that many have called unrealistic. The government instead agreed to continually monitor the deficit and ensure it doesn’t exceed the target and offered up asset sales of up to 1% of GDP and bring total debt down to 126% of GDP (from around 132% currently) as a sweetener to try and get an agreement over the line and avoid sanctions.

The ball is now in the ECs court and it must decide whether it wants a showdown with Rome which could cause turmoil for the country and fuel further anger and resentment towards Brussels. This comes at a time when populism and nationalism is already sweeping across the block and posing a threat to it. I don’t see the EC backing down as it would set a precedent for other countries to follow suit. This could present a significant risk for Italian investors in the near-term, with bonds and banks being particularly sensitive to the outcome. We could get a response from the EC by next week, leaving investors very nervous in the interim.

There’s significant risk ahead

Oil plunges again as Trump calls for lower prices

Oil prices were in freefall on Tuesday, as another Tweet from Trump pressuring OPEC not to cut oil production and a report from the cartel alluding to lower oil demand sent Brent and WTI crashing more than 7%. This is the fourth consecutive reduction to OPECs demand growth forecasts and comes at a time when supply is rising faster than expected.

Regardless of Trump’s tweet, I struggle to see how we don’t see a production cut at the meeting early next month – with the Saudi’s having already announced a 0.5 million barrel a day cut for December – but markets are not yet pricing this in and with momentum very much with the sellers, they could easily go much lower before then. We may see some near-term support around $55 in WTI and $65 in Brent but I wouldn’t be surprised to see these slip back to $50 and $62, respectively.

Oil (WTI and Brent) Daily Chart

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It’s been a perfect storm for oil as of late, with lower global growth expectations, higher output from the US, Russia and Saudi Arabia, waivers on Iranian sanctions and general risk aversion in the markets sending Brent and WTI rapidly into bear market territory. The It’s not too long ago that people were talking about the prospect of $100 a barrel oil but that now feels like a distant memory.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.