May indicates Britain will seek "hard Brexit" in EU talks

If anyone still has doubts about the precise contour, shape and colour of the Brexit envisaged by Theresa May, it should be pretty clear by the end of today. According to the briefing notes released by Downing Street, she will in her speech call for a Britain that is "self-governing, global" and one that does not seek future EU ties modelled on those enjoyed by others (eg. Norway or Switzerland).

It is further likely that she will reaffirm her existing red lines on controlling immigration and escaping the jurisdiction of the European Court of Justice. Taken together, all that means quite simply that Britain will not be applying the rules needed to attain privileged access to the single market, while the "global" aspiration would suggest it is ready to sacrifice taking full part in the EU's customs union. What the UK finally gets is up for negotiation, of course -- and there are still question marks about the exact negotiating stance of the rest of Europe, the so-called EU27. But while May won't use the term, make no mistake -- she is at least preparing for a hard Brexit.

An interesting judgment is expected from Germany's Constitutional Court today on whether to ban the far-right National Democratic Party (NPD), described by the German intelligence agency as racist and anti-Semitic. Given its nastiness, you might think a ban would be clear-cut. But under German law there must be hard proof that the party is a threat to democracy -- and with the NPD increasingly out-paced by the anti-immigrant Alternative for Germany (AfD) in polls, that is not a given. Only two parties have been banned since World War Two -- the successor to Hitler's Nazi party and the Communist Party.  As things stand, it looks as judges may shy away from adding a third to that list.

Davos-goers meanwhile have a glitzy cast to choose from on its opening day, with celebrities Matt Damon and Shakira among the featured speakers. Probably the most significant words, however, will come from Chinese President Xi Jinping, who is expected to make a pitch in favour of globalisation.

Markets at 0755 gmt

So "hard" Brexit it is, if you believe the gist of today's UK PM's speech that was trailed across the British press overnight. Theresa May is set to lay out plans for a 'clean break' from the EU in her widely flagged set piece later, effectively removing the UK's preferential, tariff-free access to the markets of its biggest trading partners in favour of immigration controls. Talk of transitional deals and hybrid trading relationships appear to have been swept aside -- whether this is just an opening negotiating gambit or not.

The pound has steadied and recovered back above $1.21, however, after Monday's slump below $1.20 on weekend signalling of the British government's stance.  While there's been some speculation it could be a case of 'sell the rumour, buy the fact' for sterling surrounding May's speech, there appears to be little encouraging in the speech for the pound and overnight implied volatility for sterling vs the dollar remains extremely high, above 20 pct.

Even the FTSE 100 stopped benefiting from the weak pound on Monday, ending its record-breaking 14-day winning streak to end slightly lower. Bank of England chief Mark Carney warned on Monday about limits to the BoE's tolerance of above-target inflation due to the pound's slide, something that has buoyed the currency today and will weigh on other UK assets. UK December inflation stats are released later today, with headline CPI inflation expected to rise to 1.4 pct -- the highest since August 2014.

An added complication is the collapse of the Northern Ireland Assembly and a snap election scheduled there for March 2. If Britain's Supreme Court rules that the devolved assemblies need to endorse the formal notification of divorce proceedings from the EU, there's now no guarantee there will be a workable Belfast assembly allowing May to trigger Article 50 by the end of March as she has pledged.

On the other hand, the combination of the "hard" Brexit tilt with the latest broadsides from US President-elect Trump against the EU and trade with Germany in particular have started to undermine the 'Trump reflation' trade more generally ahead of his inauguration on Friday. That's seeing the dollar and Treasury yields continue to dial back and offer a bid for some traditional safe havens, including gold.

While regional Asia stocks were slightly firmer on the easier dollar earlier, Japan's Nikkei lost more than 1 percent on the rising yen. US Q4 earnings resume later as markets return from the MLK holiday – IBM and Morgan Stanley are among today's big names. Germany's ZEW survey is also out for January, with eyes also drifting towards this week's ECB meeting. Brent crude is a touch firmer.