‘Don’t buy into the sterling rally as Brexit and politics weigh’

The pound staged a mini rally after UK Prime Minister Theresa May won a confidence vote this week, although that was as much to do with euro weakness as any positive sentiment towards the currency, or on clarity over Brexit.

The battered British currency was headed for its best week against the euro in over a year, which likely says more about how far it has fallen than how far it has to rise.

The best course of action is to avoid sterling if you can, but if you do have exposure as an Irish exporter, to use any rallies to lock in hedging as the Brexit process still has a long way to run. While the consensus is that a cliff-edge will be avoided, it is not a given.

“After remaining in a 89-91p range for most of December, this break lower in EUR/GBP through 89p has seen a pickup in customer activity as Irish exporters look to take advantage of sterling strength against what remains a very uncertain backdrop regards the next steps in the Brexit process,” said Philip Hartley, head of FX & emerging markets, Bank of Ireland Global Markets. “Importers should be cognisant of the upside risks for sterling however we are not complacent about the current situation, significant downside risks still remain.”

Since the 2016 referendum, the UK has sunk from being one of the top-performing developed economies to close to the bottom of the pack and the risks from Brexit look like being prolonged.

The bullish case for UK economic growth is that once the uncertainty is removed, even in the case of a hard Brexit, growth will resume and asset prices, including the pound, can recover.

The problem with that view is that the consensus has proved to be horribly wide of the mark.

And financial markets have a terrible record when pricing political risk, whether it was shock election victory of Donald Trump, or Britain’s 2016 referendum.

The pound is down 16pc since the referendum and while resolving Brexit will set the tone for markets, finalisation of Brexit may well produce yet more uncertainties.

The ‘Financial Times’ reported on Friday that Britain had failed to secure most of its post-Brexit trade deals, something the government had boasted would be easy to do.

Brexit may also usher in a Labour government under Jeremy Corbyn, who promises a radical departure from the free-market policies that have held sway since the 1980s and it is he who likely holds the key to unravelling the relationship with the EU.

“Up to now, his strategy has been to sit on the political fence throughout the entire Brexit process and wait for the Conservatives to make such a mess of Brexit that he could win the next election,” said Jacob Funk Kirkegaard of the Peterson Institute for International Economics, a Washington, DC, based think tank.

“Now the polls suggest the voters are ready to reject him over his apparent passivity, if not impotence.”

Mr Corbyn has been in the British parliament since 1983, but has never been in government and has defined himself in terms of his opposition to Conservative policies and to many of those from Labour when they were in power.

His approach to the EU would be to hold more talks, stop free movement and to remain in a customs union, although many of his policies would run foul of EU rules.

With global growth slowing, and credit markets tightening, the room for tolerance of radical policies looks set to diminish.

And Mr Corbyn’s plans for higher business taxes, more government spending and a nationalisation programme may well mark the start of another downturn in the pound’s fortunes.

Italy weighs merger plans to safeguard struggling banks

Italy is considering merging troubled banks Monte dei Paschi and Banca Carige with healthier rivals such as UBI Banca as it scrambles to avert a new banking crisis, sources familiar with the matter said.

Monte dei Paschi, rescued by the state in 2017, and Carige, recently put into special administration by the European Central Bank (ECB), are struggling with bad debts and the prospect of asset writedowns that would eat into their capital.

Their problems threaten to reignite a banking crisis that Rome thought it had ended two years ago and could further damage an economy already at risk of slipping back into recession.

According to one of the sources, the options being considered even include the possibility of a three-way merger that would bring together Monte dei Paschi, Carige and UBI. The banks and the Italian treasury declined to comment. Discussions are at a very early stage and no final plan has been drawn up by the anti-establishment government, which has criticised past bank bailouts and wants to avoid spending taxpayer money to rescue lenders.

Several government officials have publicly voiced support for mergers that would strengthen the banking industry. Stefano Buffagni, cabinet undersecretary and a prominent member of the ruling 5-Star Movement, said this week the government should play a leading role in engineering such tie-ups.

US online gambling reversal puts ‘chill’ on massive industry

The US Justice Department’s decision to expand a federal prohibition on internet gambling will cast a pall on the industry as businesses and state lotteries evaluate the implications of the change and the government’s plans to enforce it.

The US now says the US Wire Act bars all internet gambling that involves interstate transactions – reversing its position from 2011 that only sports betting was prohibited under a law passed 50 years earlier.

The move sours the mood in a massive industry with the potential to get even bigger, after a US Supreme Court decision last year that states could legalise gambling on individual sporting events. While the federal law specifically prohibits transmission of wagers and related information across state lines, the Justice Department’s new interpretation will impact all online gambling because – as a practical matter – it’s difficult to guarantee that no payments are routed through other states, said Aaron Swerdlow, an attorney with Glaser Weil Fink Howard Avchen & Shapiro LLP in Los Angeles.

“This will have a chilling effect on investment and expansion in the industry,” Mr Swerdlow said. “You are going to see legal challenges.”

The reversal was prompted by the department’s criminal division, which prosecutes illegal gambling. The opinion issued about seven years ago that the 1961 Wire Act only banned sports gambling was a misinterpretation of the statute, according to an opinion by the department’s Office of Legal Counsel made public on Monday.

The new reading of the law will probably be tested in the courts as judges may entertain challenges to the government’s view of the law’s scope, the Justice Department said.

It may also affect states that began selling lottery tickets online after the 2011 opinion, as well as casinos that offer online gambling.

A coalition backed by billionaire casino executive, Sheldon Adelson, lobbied the Justice Department in 2017 to reconsider its 2011 decision that cleared the way for states to allow online gambling.

The businesses that will be most directly affected are interstate lotteries that have become well established after 2011, said Dennis Gutwald, an attorney with McDonald Carano in Las Vegas. The Justice Department’s new reading of the law won’t affect intrastate online wagering, where patrons bet only from within a single state.

The US Supreme Court ruled last year that states other than Nevada could also permit sports betting.

New Jersey and other states that now allow sports wagering restrict those activities to individuals physically within the state. The Justice Department’s change of heart will be an obstacle to an exemption between Delaware, Nevada and New Jersey that allows people from those states to play poker against each other online, Gutwald said.