US markets once again saw record highs yesterday with IBM leading the way, posting its best one day performance since 2009, while banking stocks also performed well as yields edged higher after the Fed’s Beige Book survey painted a positive picture of the US economy despite the disruption caused by hurricanes Harvey and Irma.

In Asia while all eyes were on China’s Communist party congress and the type of vision that President Xi sees for the Chinese economy over the next five years. It does appear that Xi wants to do more to protect the environment, a not unreasonable aspiration given the air pollution levels. Based on current data the Chinese seem well placed to do it given that they are already global leaders in solar and wind power, and have spent the last ten years building 22,000km of high speed rail links, more than the rest of the world combined, with the intention of extending that to 30,000km and most of China’s cities by 2020.

There was no mention of concerns about corporate debt levels which remain eye wateringly high, though he pledged to continue cracking down on corruption.

In the meantime the latest Chinese Q3 GDP numbers showed that the Chinese economy grew at 6.8% as expected, while September industrial production and retail sales came in at 6.6% and 10.3% respectively, both beating expectations. Investment growth grew at its slowest rate in 18 years.

It’s also deadline day in Catalonia today with the prospect that Spanish PM Rajoy could well be forced to trigger article 155 of the Spanish constitution and seize direct control of the Barcelona parliament, unless Catalan President Puigdemont clarifies what he meant in his speech last week. As if to pre-empt that there were reports last night that any attempt to do that would prompt a declaration of independence in response. It’s hard to see how this one can end well.

 

It’s also EU summit day today and for all the talk of compromise there seems to be precious little of either coming from either side, with the EU side actually tightening up their guidelines when it comes to money. With nerves starting to fray on the part of business there is a concern that politicians on both sides are playing with fire. A hard Brexit would not only be damaging for the UK but also for Europe, and Ireland in particular.

In the UK consumer incomes remained squeezed in the three months to August, coming in at 2.1%, slightly below expectations, which was a bit of a disappointment, however the labour market continues to look fairly strong.

While wages remain steady it is inflation that is proving to be the headache for the Bank of England and while the Brexit vote was a symptom of that, the banks subsequent reaction function didn’t help matters, and with inflation currently at 3%, there is a risk that inflation may well have further to go over the next couple of months. This is likely to exacerbate the income squeeze further in the run up to Christmas.

On the topic of a possible rate rise in the coming weeks, while the data yesterday wasn’t exactly supportive there was nothing in the data to suggest that we wouldn’t see one either. More crucially given concerns about inflation becoming entrenched the balance of probabilities would suggest that a hike is probably going to come, and markets continue to believe that with bond markets still predicting an 80% probability of a move next month.

Despite this retail sales have held up fairly well in recent months though one has to ask how much this may have been financed on consumer credit. The last three months have seen positive months for retail sales, and with Christmas coming it wouldn’t be too much of a surprise if we were to see a pause in the September numbers. Expectations are for a slowdown from August’s 1% rise to no change or a slightly negative reading of -0.1, as Q3 comes to an end.

EURUSD – held above 1.1730 yesterday but we need to overcome the 1.1830 area to retarget the 1.1920 area. Below 1.1730 retargets the lows this month at 1.1670.

GBPUSD – has managed to remain above the 1.3120 level and while it does so the upside remains intact, though we also have support at the lows this month at 1.3020. We need a move back the 1.3340 area to retarget the 1.3420 area. 

EURGBP – the move back through the 0.8930 level yesterday raises the prospect of a move towards the 50 day MA at 0.9020/30. We also have resistance at the 0.8970 level, and while below that the key reversal remains intact. Support comes in at the 0.8870 level. 

USDJPY – pushed back through the 112.50 area and looks set for another push towards the 113.40 area, a break of which could well see a crack at 114.00. Pullbacks should fund support at this week’s lows at 111.60.

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