Back to insights Future of finance

Trump fails to repeal Obamacare, May prepares to trigger article 50

Wall Street endured another extremely tense session on Friday that culminated in Republican leaders scrapping a keenly-anticipated vote on healthcare reform after President Donald Trump failed to secure sufficient support for it to be passed. The S&P 500 swung from losses to gains and back again in the last half hour of trading and finally settled 0.1 per cent lower at 2,344. For the week, the benchmark equity index fell 1.4 per cent, its largest such decline this year.

The CBOE Vix volatility index, watched by many as a gauge of stock market stress touched a 2017 high above 14 before easing back to end at 12.96, down 1.2 per cent. The mood in the markets had been cautious even before the news, after the House vote to repeal “Obamacare” was postponed from Thursday, heightening uncertainty about the fate of President Trump’s other economic plans. Those doubts manifested themselves in the markets earlier in the week after the S&P 500 suffered its first one-day decline of more than 1 per cent since October abruptly halting the steady grind higher for US stocks since the presidential election. “Investors viewed the repeal vote as a test for Republican party discipline and its ability to push fiscal and social reform swiftly through legislation,” said strategists at Morgan Stanley.

Early losses for the dollar against the euro on Friday were pared after the healthcare vote was pulled. The single currency was still up 0.1 per cent at $1.0793, but off an earlier high of $1.0818. The dollar reversed an early dip versus the yen to stand 0.2 per cent higher at ¥111.20. The euro found some support from survey data on Friday that suggested the eurozone’s economic recovery was continuing to gather pace in March. Meanwhile, a strong take-up of cheap loans offered by the European Central Bank under its final TLTRO2 operation this week appeared to increase the likelihood of a shift in the ECB’s forward guidance on rates in June, and an announcement that quantitative easing would be tapered from the beginning of 2018, analysts said. Sterling, which had been boosted this week by stronger than expected inflation and retail sales data, was down 0.2 per cent to $1.2489.

However, since the vote government bonds and gold have gained as investors sought havens. The US dollar is lower against a variety of currencies in Asia as investors tempered expectations of pro-business reforms from the Trump administration after Republicans failed to unify around the healthcare reforms. The dollar index is down 0.3 per cent at 99.3, dropping further below the psychologically important 100-point mark and at its lowest point since February 2. Japan’s yen was leading gainers with a climb of 0.9 per cent to ¥110.33 per dollar, its strongest since November 22. The euro was up 0.5 per cent versus the dollar at $1.0849, the strongest since December 8.

One of the biggest events in Britain’s postwar history is at hand, as Theresa May notifies the EU of the UK’s plans to withdraw. Both the British government and its critics agree that after the prime minister’s activation of the Article 50 divorce clause in the EU treaty, scheduled for Wednesday, there is no way back. At stake are not just the country’s ties with its European neighbours the largest trading bloc in the world, but its economic relations with many other states. All sides of the debate agree that Brexit will shape what kind of country the UK becomes once it ends more than four decades of EU membership. The country’s prospects will in large part depend on the 262 words of Article 50.

So what is Article 50? Introduced in 2009, Article 50 of the Treaty on European Union provides the formal exit mechanism for a country wishing to leave the EU. Its key provision is that, in the absence of a unanimous agreement to extend negotiations, a country activating the clause will leave the bloc two years after notification. That means Britain will be out of the EU by April 2019. The text of the article says the EU will “negotiate and conclude an agreement with [an exiting member] state, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”. So while the negotiations are specifically about divorce, dealing with issues such as financial obligations and expatriate rights, future ties between the EU and the UK also play a part.

A comprehensive trade deal would be separate from an Article 50 agreement and would require unanimity among member states. That is a higher hurdle than the requirements for the exit agreement itself, which needs to be backed by the UK, a “super qualified majority” of the other EU countries (at least 72 per cent of the states representing 65 per cent of the population) and the European Parliament.

What happens now? Donald Tusk, president of the European Council, said recently that the EU could respond with draft guidelines for the divorce negotiations within 48 hours. But the formal response will require the endorsement of leaders of the EU’s other 27 countries at a summit on April 29. At issue will be the content and structure of the talks with the UK — whether to insist, as does Michel Barnier, the EU’s chief negotiator, that the two sides first negotiate over the UK’s exit bill and the rights of citizens before beginning talks on future ties. Britain opposes this sequential approach and puts a higher priority than Mr Barnier on striking a trade deal, and not just a divorce agreement, within the two years set out by Article 50.

Formal talks cannot take place until the member states give the European Commission a more detailed, and confidential, negotiating mandate. So the first face-to-face encounter is unlikely before late May. The UK wants to agree any transition measures by March 2018. Mr Barnier has set October 2018 as the deadline to agree the deal, to allow time for ratification.

What is the British government looking for? Theresa May, became much clearer about her goals in a speech in January and a subsequent white paper. Her government wants to control the number of people who come to Britain from Europe and end the European Court of Justice’s sway over British law. Mrs May acknowledges that those conditions mean the country will leave the EU’s single market and customs union, since that would prohibit the UK from striking trade deals of its own. But she still wants Britain to have a customs agreement of some sort with the EU, and a “new, comprehensive, bold and ambitious free-trade agreement” with the bloc. Mrs May also wants to maintain the common travel area between the Republic of Ireland rather than “return to the borders of the past”. On one of the most sensitive issues facing both sides, she said in her January speech that “we want to guarantee the rights of EU citizens who are already living in Britain, and the rights of British nationals in other member states, as early as we can”. “We seek a new and equal partnership between an independent, self-governing, global Britain and our friends and allies in the EU. Not partial membership of the EU, associate membership of the EU, or anything that leaves us half-in, half-out. Theresa May speech, Lancaster House, January 17 2017 “When a country leaves the union, there is no punishment. There is no price to pay to leave. But we must settle the account.

This will be an interesting week.

EUR/USD – Current Price $1.0857 (+$0.0060)

EUR/USD has begun the week on the front foot, rising to its best level since December 8th in recent trade. The pair has benefitted from broad Dollar weakness as investors react to Friday’s news that the Trump administration had pulled the House vote to begin the repeal and replacement of the ‘Affordable Health Care Act’. The Euro will also likely have benefitted from news over the weekend that German Chancellor Merkel emerged victorious in the Saarland election. Looking ahead, German IFO figures at 09:30 BST are in focus this morning although any further developments in Washington will also be closely watched. From a technical view, we look for resistance at the December 8th high of $1.0872 followed by the November 11th high at $1.0923. On the downside, the overnight low at $1.0794 and Friday’s low at $1.0759 are in focus.

GBP/USD – Current Price $1.2538 (+$0.0070)

GBP/USD has rallied overnight, reaching a high of $1.2544 in recent trade which is the best level since February 24th. Gains come amid broad Dollar weakness to start the week as investors react to Friday’s news that the Trump administration had pulled the House vote to begin the repeal and replacement of the ‘Affordable Health Care Act’. The pound may also have benefitted from news that UK PM May is visiting SNP leader Sturgeon today. From a technical view, we look for resistance at the February 24th high at $1.2570 and February 9th high at $1.2582. On the downside, Thursday’s low at $1.2459 and Wednesday’s low at $1.2421 may offer support.

USD/JPY – Current Price ¥110.15 (-¥1.18)

USD/JPY tumbled to its lowest level since November 18th overnight as the US Dollar lost ground across the board. US yields have also fallen during the Asian trading session as investors react to Friday’s news that the Trump administration had pulled the House vote to begin the repeal and replacement of the ‘Affordable Health Care Act’. The BoJ ‘Summary of Opinions’ failed to prompt much reaction in the pair as officials noted it will take some time but inflation is expected to gradually increase towards 2%. From a technical view, we look for support at the November 18th low of ¥109.76 followed by the November 17th low at ¥108.51. On the upside, Thursday’s/Wednesday’s high at ¥111.48/57 may offer resistance.

GBP/EUR – Current Price €1.1547 (+€0.0001)

GBP/EUR is little changed ahead of the European open. We saw some modest strength in the Euro on news that German Chancellor Merkel emerged victorious in the Saarland election. This was countered however my modest gains in the pound amid reports that UK PM May is visiting SNP leader Sturgeon today. Looking ahead, German IFO will be in focus amid a lack of any UK releases. From a technical view, last Wednesday’s low at €1.1492 and Tuesday’s low at €1.1456 may offer support. On the upside, last Thursday’s high at €€1.1620 and the March 3rd high at €1.1680 are in focus.

 

Related Insight

More Insights