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US tax reform vote and Brexit breakthrough overshadow N. Korea missile launch

European markets had a much better day yesterday, helped in no small part by a rebound in the US dollar, which pushed the euro lower on the day, while the FTSE100 enjoyed its best one day performance since the beginning of the month, helped by a strong performance from the oil and gas sector.

US markets surged to fresh new record highs overnight, after the Senate budget committee voted to send the tax bill to the Senate floor by a narrow majority, bringing the prospect of some form of deal by the end of the year much closer. Amongst other measures the prospective bill would cut the US corporate tax rate from 35% to 20% from 2019.

Having only crossed the 23,000 level on the 17th October, yesterday’s rally took the Dow conclusively through the 23,600 level to within 150 points of 24,000, and not even another North Korean missile launch caused the market to blink.

As a result of last night’s new US records, markets in Europe look set to open higher, though the FTSE100 is likely to be an exception after the pound rebounded strongly on reports that the UK and EU had agreed on the sum of the Brexit divorce bill.

While agreeing a sum may be smart politics in trying to force the EU to the table to discuss trade there is no guarantee it won’t cause palpitations in certain parts of the Conservative party. It now remains to be seen having made the offer whether the discussion does in fact move in the direction of trade in order that the Irish border question can also be addressed in tandem in the coming months. While one obstacle looks to have been cleared it remains to be seen whether the Irish government will follow through on their threats to veto further progress unless certain guarantees are met with respect to the border issue.

The US dollar had another positive day yesterday as it continues to recover some of the ground it has lost in the past week or so ahead of today’s final iteration of Q3 GDP. At the time there was concerns that the double hit from hurricanes Harvey and Irma might act as a drag on US economic performance. Thus far that doesn’t appear to have been the case given that the last reading showed an annualised expansion of 3%.

Today’s forecast is expected to see that revised to 3.2%, which rather begs the question as to what it might have been without the hurricane effect. Given the effects of the hurricanes there is a risk that this estimate could well be on the optimistic side.

Following on from Fed chair designate Powell’s testimony to the Senate Banking Committee yesterday it is the turn of the current incumbent Janet Yellen to appear in front of Congress. It seems likely that she will face questions about her recent comments about US inflation when she admitted that the current low inflation environment was “a mystery”.

In these recent comments she went on to caution that low inflation could become dangerous which some interpreted to mean that the US central bank may well start to exhibit much more caution when it comes to further tightening measures, particularly since current levels of inflation are expected to show that prices remain well below the Fed’s 2% target at 1.3%.

Crude oil prices have continued to slip back ahead of tomorrow’s OPEC meeting as doubts grow that the oil cartel will deliver in full on its promises to freeze output until the end of next year. The restart of Keystone albeit at lower levels has also acted as a drag on prices. Despite recent losses US prices are still 8% higher on the year, while Brent prices are up over 12% so whatever is decided tomorrow the risk does appear to be tilted towards a downside correction after three successive months of gains.

The pound had a positive day despite seeing the OECD downgrade its latest estimates for the UK economy for 2018 and 2019 to 1.1%, reversing early losses on reports of the breakthrough in the Brexit talks. Yesterday’s Bank of England stress tests saw all of the major banks come through them fairly comfortably despite concerns about rising consumer debt.

We have seen in recent months that UK consumers have started to rein back in this area and this trend is likely to continue in the latest October numbers as lending criteria get tightened.

Net lending is expected to come in at £4.3bn, a sharp slowdown from September’s £5.5bn, while mortgage approvals are expected to come in at 65k. Net consumer credit is come in at £1.5bn.

EURUSD – continues to struggle below the 1.1970 area and could well see further declines if we break below the 1.1850 area, which in turn could well open up the 1.1720 area. Above the 1.2000 level retargets the previous highs at 1.2095. 

GBPUSD – slipped back to the 1.3220 level yesterday before rebounding sharply keeping the prospect of a move towards the 1.3450 level on the table. Only a move below 1.3120 opens up the prospect of a retest of the range lows at 1.3030.

EURGBP – currently struggling to get above the 0.8960 area and 100 day MA. A break here targets a retest of the 0.9020 area. While below the risk is for a move back towards the 0.8820 level. We could see a test of major support near the November lows at 0.8735.

USDJPY – while below the 200 day MA and 111.80 level we remain vulnerable to a move towards the 110.70 area. This negative development could see a revisit of the range lows near 108.50. We need to see a move back above 112.00 and the 200 day MA to stabilise

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