Theresa May survived a vote of no confidence, not a great surprise. The Brexit saga will continue as demands for a people’s vote increases. One feels the idea of those calling for a second vote may want to be careful what they wish for. The consequences of another vote, in the unlikely event it will occur, could be damaging for the country whichever way it goes. Despite the uncertainty, the pound continues its recent recovery. Speculators must hope for an eventual improvement to the original deal or believe the 29th of March, the scheduled date for the UK to leave the EU, will be postponed.
Let’s deal with the start of the results season and then briefly cover Brexit and how markets immediately reacted to the result of the vote. JP Morgan reported earnings that missed expectations, the first time for 15 quarters. In contrast, Citi earnings beat market analysts estimates, and the shares rallied. CEO Michael Corbat said management "clearly" saw "a disconnect between what we see in our business and what the markets are saying," adding that they found no evidence of a significant slowdown. JP Morgan share price initially dropped then recovered, Citi rallied as much as 4%. This start appeared to reassure equity investors.
The past week saw the recovery in equity markets continue, the S&P 500 climbing over 2% the markets in Europe around 1%. The Vix index closed the week back below 20, suggesting investor confidence continues to return. Ahead of the Brexit vote on Tuesday as MP’s struggle between backing a deal they don’t like or facing a “no deal” the pound had a good week against the US dollar, rising close to 1.29. Part of the recovery is being aided by some dollar weakness post a more dovish Federal Reserve statement. Optimism on trade talks with China helped the trade-sensitive stocks, such as industrials and semiconductors outperformed the broader index. Smaller capitalised Russell 2000 index continues to outperform the broader S&P 500.
The minutes of the December Federal Reserve interest rate meeting delivered a dovish tone. This would suggest the Federal Reserve may becoming more cautious, post the last quarter market volatility, to increasing interest rates further. Indeed, the minutes referred to the possible impact the recent market volatility could have in confidence in the broader economy. Equity market investors were often comforted, as the global economy recovered from 2008, that the Federal Reserve would provide underlying support for asset prices, using monetary policy. The term used by traders was the “Fed put “, describing a financial instrument that can be used to protect the investor's downside in times of uncertainty. This ”put “had slowly been removed as the global economic recovery took hold.
The equity bull market seems in full flow once again. The S&P 500 has rallied over 5% from its lows before Christmas. As much as Jerome Powell was seen as the villain of the equity market, last week’s speech seems to have turned into Prince Charming. It just goes to reemphasise when sentiment moves too far in one direction and emotions become consensual markets to move in the direction that causes the most pain.