Caution over rising coronavirus cases saw European markets underperform yesterday, struggling to make much in the way of headway.

US markets had a slightly more positive finish buoyed by a faint hope that House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin would be able to cobble together the bare bones of some form of stimulus package. There was some encouragement to this view given that Pelosi had expressed optimism that a deal was possible, as well drawing back from her insistence that her Tuesday deadline had been a hard date for a deal to be done.

The gap between the two sides has certainly narrowed in terms of the headline number, with the Republicans upping their offer to $1.9trn, however splits still remain on state and local aid as well as liability protections for businesses. This would suggest that last night’s optimism over the framework for a deal was somewhat misplaced, as once again Pelosi and Mnuchin agreed to pick up for further talks later this afternoon. So much for a Tuesday deadline, however Nancy Pelosi did say she’s now hopeful of a deal this week. It seems that the deadline for a deal remains very much a moving target, and for now that appears to be supporting risk, with Asia markets broadly positive.

With this in mind, and despite trade talks between the EU and UK being stuck in the mud, lockdown restrictions being tightened further in the UK, and Manchester set to go into tier 3 later this week, it still looks like we could see European markets open slightly higher this morning.

On the data front we’ll get the latest UK inflation numbers for September, after the sharp drops seen in August, which were driven by lower prices in restaurants and cafes as a result of “eat out to help out” and lower air fares and clothing prices. These are likely to remain subdued and while we may see a pickup in restaurant prices as the Chancellors’ £522m “eat out plan” rolls off; we do know that some pubs kept prices low into September to encourage continued footfall.  

Headline CPI is expected to rise modestly to 0.6% from 0.2%, while core prices are expected to rise from 0.9% to 1.3%. While this is likely to be welcomed by the Bank of England, there is a concern that this is only likely to be a temporary respite, after sharp falls in producer prices in August. These tend to be a leading indicator of future inflationary or deflationary forces, and these have been in deeply negative territory for several months now, though they have shown some signs of improvement recently. Input prices are expected to come in at -5.4%.

Public sector borrowing for September is also expected to rise by another £32.4bn, a slight improvement on the £35.2bn seen in August, bringing the total borrowed since March to the eye watering sum of £217bn.

When dealing with sums like this, it does rather beggar belief that the UK government and leaders in Manchester are quibbling over as small a sum as £5m. It’s like discussing a rounding error, and UK gilt markets don’t seem that concerned, given the eye watering sums being spent elsewhere around the world.

If markets are to be concerned about anything it would be by the competence, or otherwise of those holding the purse strings, and on that score the jury remains out, though to be fair to chancellor Rishi Sunak, he stands out for all the right reasons, unlike some of his counterparts in government.

EUR/USD – the break above the 1.1800 level potentially opens up a return to the September peaks at 1.1985, however there is also minor resistance at 1.1900. Support should now come in at the 1.1780 area and 50-day MA for this to unfold.

GBP/USD – has remained surprisingly resilient, currently trading between 1.2900 and 1.3000, with solid support down near the 1.2850 level. A break below could well see a move back towards the September lows at 1.2675.  

EUR/GBP – the break above trend line resistance at 0.9110 has potentially opened up a move towards the 0.9160 area, and the highs this month. A move back below the 0.9100 area, has the potential to open up a return to the recent lows at 0.9010.

USD/JPY – currently range trading between the 105.20 area and 105.80. While above the 104.80 level it is vulnerable to a squeeze higher. A move below 104.80 targets a return to the September lows at 104.00.  Resistance remains all the way back at cloud resistance at the 106.20 area.


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