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May soldiers on as confidence vote fears subside

It was a disappointing week for European and US stock markets, buffeted by concerns about slowing growth, as well as fractious politics.

In Europe the Germany contracted in the third quarter while Italian politicians sent back their budget to the European Commission with only a few minor tweaks, almost daring them to fine them for noncompliance. While bond yields have edged a little higher it appears that bond markets aren’t prepared to punish the Italian government quite yet. This is probably down to the fact that what the Italian government is proposing isn’t exactly budget busting. The main criticism appears to be around whether it will be successful, with the EU’s alternative solution unlikely to work that much better.

In the US tech stocks came under further pressure as investors reassessed elevated valuations on chip makers in particular after another warning, this time from Nvidia who slashed their Q4 guidance on revenues. 

Having had the weekend to absorb the events at the end of last week, we appear to have no better idea as to whether the Prime Minister will face a leadership challenge than we did on Friday.

A satisfactory Brexit solution would appear further away than ever, and despite speculation that Graham Brady, head of the Conservative Party 1922 committee might well get the required 48 letters for a leadership challenge, we still seem no nearer to knowing whether the numbers are there than we did on Friday, which rather begs the question if they can’ t get the numbers now, will they ever be able to do so.

It also raises another point in that even if they were to get the numbers, would they be able to get enough votes to force her out. If Sir Graham Brady is to be believed in comments made at the weekend, he suggested that the Prime Minister would win any confidence vote, which may help explain why a number of Brexit supporting cabinet ministers, including Michael Gove decided to stay.

Furthermore, none of the politics at the weekend changes the parliamentary arithmetic around the prospects of getting this deal past MP’s, which means we are quite likely to see further sterling volatility as the partisan politics of parliament continues to take centre stage, with calls for another election, or another referendum a continued refrain, as if either would somehow change the options in front of parliament.

The opposition Labour party continues to make the absurd argument that it would be able to negotiate a better deal that meet its supposed six tests, which the EU has made it quite clear that it won’t agree to. 

One bone of contention does appear to have been addressed with respect to the transition period with respect to the maximum transition period where 20XX has been replaced with 2022 as a maximum one off end date, however the issue of the “backstop” remains the contentious issue.

In the event she is able to able to keep her opponents at bay the Prime Minister will head to Brussels later this week to make progress on the so far 7-page political declaration on the future relationship between the EU and UK. Before that she will use her speech at today’s CBI conference to insist that the withdrawal agreement cannot be changed and that the next steps will be to work on the future trading relationship. The Brexit supporting members of her cabinet are still hoping to negotiate a clause given the UK the right to unilaterally end any backstop arrangement.

The US dollar had a disappointing week, sliding sharply on the back of comments by Fed vice chair Richard Clarida, when he expressed concern about slowing global growth and also suggested that the US central bank was close to its so called “neutral rate”.

This raises the prospect that the Fed may well be closer to the end of its rate hiking cycle than previously thought. While it doesn’t diminish the prospect of a rate rise next month, it does call into question how many more rate rises we’ll get in 2019. These comments along with the head of the Dallas Fed Robert Kaplan suggest that we could start to see further divisions open up between Fed members about the current pace of monetary policy tightening.

This week’s focus, apart from Brexit, and the potential for further US dollar weakness, is likely to be on the central banks of the RBA and ECB with the latest monetary policy meeting minutes as well as the latest Bank of Canada financial system review, and the retail sector as the Black Friday band wagon gets underway. 

EURUSD – appears to have found a base around the 1.1210 area, and could well be on course for a move back to the 1.1500 area. The 1.1180 area remains a key support, with a break targeting a move towards 1.1000.

GBPUSD – key support remains near the August lows at 1.2650, and while above here the recent range is likely to remain intact. Below 1.2600 could well open up a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2920 to stabilise and prompt a retest of last week’s peaks at 1.3075.

EURGBP – could be set for a retest of the 0.8940 area, while above the 0.8820 area. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.

USDJPY – last week’s failure to retest the October peaks at 114.60 appears to have set up a bearish weekly reversal which could well precipitate further losses towards 111.80. While below 113.70 the bias remains for a push back to the October lows.

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