LDN - Business

World stocks hold nerve after May's Brexit defeat, pound steady

[January 16, 2019] By Tom Wilson

LONDON (Reuters) - World equity markets on Wednesday held their nerve after the heavy parliamentary defeat of British Prime Minister Theresa May's Brexit deal as investors saw potential for legislative deadlock forcing London to delay its departure from the EU.

May's government faces a no confidence vote at 1900 GMT after the shattering rejection of her Brexit blueprint on Tuesday evening left Britain's exit from the European Union in disarray.

May is expected to survive the vote, sponsored by the main opposition Labour Party, but investors could see scant sign of a breakthrough in the Brexit impasse.

As a result, they are increasingly betting on Britain being forced to postpone its planned March 29 exit, though few have any clarity on what that would mean for the country in the longer run.

Stock markets had largely priced in the overnight defeat, and for the most part held on to early gains that mirrored earlier resilience in Asian markets.

There, stocks had shrugged off May's defeat and were lifted by signs that China will take more steps to bolster its slowing economy and the U.S. Federal Reserve might pause its run of interest rate rises.

"Markets seem to be pricing in a greater probability of a 'soft Brexit'," said Azad Zangana, a European economist and strategist at Schroders. "However, we believe that investors are getting ahead of themselves."

The MSCI world equity index <.MIWD00000PUS>, which tracks shares in 47 countries, ceded early gains to slip 0.1 percent, while European stocks <.STOXX> gained 0.2 percent.

French and Spanish bourses edged up, while Germany's main index lost 0.1 percent. Britain's main equity index <.FTSE> dropped as much as 0.6 percent with investors shifting focus from Brexit to results and news of mergers and acquisitions.

SUPPORT FOR THE POUND

Expectations of a softer Brexit - perhaps incorporating the Labour Party's idea of membership of a permanent customs union - gave support to the pound.

Sterling held at a two-month high against the euro and was largely flat against the dollar after seesawing in a broad 1.5 percent trading range overnight.

By shortly after midday, the pound was trading at 88.62 pence per euro <EURGBP=D3>, its strongest level since late November, and was down 0.1 percent at $1.2851 <GBP=D3>.

"We do think it is unlikely that sterling will fall to fresh lows unless the current government falls, and that is unlikely although the risk is not zero," said Alvin Tan, an FX strategist at Societe Generale in London.

Tan said sterling is valued relatively cheaply, in part because of the lingering possibility that Britain could crash disruptively out of the EU without a deal.

TRADE TALKS

Asian shares had responded well to China's central bank injecting a record amount of money into its financial system. That underscored Chinese officials' commitment to signaling more measures to stabilize a slowing economy.

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A share trader starts his trading systems at the start of the trading session the day after the Brexit deal vote of the British parliament at the stock exchange in Frankfurt, Germany, January 16, 2019. REUTERS/Kai Pfaffenbach

MSCI's broadest index of Asia-Pacific shares outside Japan ticked up 0.1 percent and South Korea's Kospi <.KS11> and Hong Long's Hang Seng <.HSI> both scaled six-week highs.

Global markets have drawn succor from the resumption of Sino-U.S. trade talks, though scepticism over the absence of detailed progress was underlined overnight as the U.S. trade representative said that he saw no headway made on structural issues during U.S. talks with China last week.

Investors are also betting that the U.S. Federal Reserve will slow its planned interest rate hikes.

On Tuesday U.S. policymakers agreed the Federal Reserve should pause further hikes until it is clear how much the U.S. economy will be held back by larger risks such as slowing growth in China.

Investors "are mainly focused on the outcome of the U.S.-China trade negotiations, but it may take more than a month before it will become clear", said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

The dollar was buoyant, gaining 0.1 percent against a basket of six major currencies <.DXY> to 95.921, and climbing 0.2 percent against the yen at 108.58 yen <JPY=>.

The euro <EUR=> slipped 0.4 percent against the dollar to 1.1280. The single currency has lost nearly 1.5 percent from a 12-week high hit on Jan. 10.

In sovereign debt markets, British government bonds underperformed versus German peers in early trade, with March gilt futures <FLGcv1> opening 30 ticks lower at 122.90, lagging German Bund futures <FGBLc1> by around 10 ticks.

Long-term U.S. Treasury yields <US10YT=RR> dropped to an 11-month low of 2.543 percent at the start of January but have since bounced back above 2.70 percent.

Oil prices slid into the red after climbing about 3 percent in the previous session on expectations that OPEC-led supply cuts will tighten markets despite signs of a global economic slowdown.

Brent crude oil futures <LCOc1> were at $60.34 per barrel by late morning, down 0.5 percent from their last close.

(Reporting by Tom Wilson; Additional reporting by Josephine Mason in London, and Daniel Leussink and Hideyuki Sano in Tokyo; Editing by Mark Heinrich)

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