It's notable that the record highs seen in the Dow Jones, S&P 500, Russell 2000 and Nasdaq indices are not replicated in the Dow Jones Transportation index, given that it would be this sector above all others which should feel the benefits of a significant fiscal boost to the US economy.
Nevertheless these record highs for US markets have helped to underpin European markets despite some recent softness, while optimism over an OPEC deal in the next week or so is helping drag the energy sector higher.
While we’ve been here before with OPEC and non-OPEC members the narrative does appear to be shifting in that there now appears to be some talk of cuts to production, never mind a freeze as has been the case for most of this year. That being said despite the recent rebound we still remain some way below the highs seen in October, and below the $50 a barrel level which suggests that for all the optimism we still need to see more than just talk. We’ve heard an awful lot of reluctance from countries like Nigeria, Iran and Iraq about a reluctance to cut production that it will need a significant shift of position for any type of agreement to even stick.
That would suggest that we’ll probably see an awful lot of white noise between now and the end of the month and next week’s meeting in Vienna.
As for today the main focus of the markets attention will be on the UK Autumn Statement and the latest FOMC minutes.
Today’s Autumn Statement is more likely to be a case of tinkering around the edges rather than outlining a new budget and fiscal plan, with some announcements already well flagged beforehand.
The current economic outlook, with another revision to Q3 GDP due out at the end of this week has in all likelihood removed the need for a root and branch approach to the UK economy. In summary it’s likely to be a “Tinkerman” budget.
A more comprehensive overview is likely to come in the March budget when we are likely to find out if Article 50 is likely to be triggered as is expected at the end of Q1.
We already know that Mr Hammond is set to adopt a much more flexible time frame with respect to balancing the books, and in so doing may well adopt some modest fiscal measures to cushion some of the effects of the expected rise in prices that could be a hallmark of next year, along with investment in improved broadband and 5G.
The government has also committed itself to a third runway at Heathrow, however the fact remains that there won’t be any economic benefit to this until the middle of the next decade, which means that we could see some measures to encourage regional airport expansion along with measures to improve Britain’s road and rail network links.
It was no surprise that the last Fed meeting at the beginning of this month saw central bank officials leave monetary policy unchanged, albeit with two dissents. A move at that time was never likely given the proximity of the US Presidential election, and given the outcome it was wise that the Fed adopted a wait and see approach.
Now having absorbed the fallout and the possible direction of travel of the new incumbent’s possible policy program, markets are starting to price in the potential outcomes, and even without recent events the prospect of a rate rise next month in December was always highly likely.
Today’s minutes aren’t likely to alter that and recent policy statements from Fed officials since then have merely served to reinforce that we’re pretty much certain to get a 25 basis point rate rise at the December meeting.
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EURUSD – still look on course for further losses towards the 1.0460 level and last year’s low. To stabilise we need to see a recovery back through the 1.0730 area. If we can’t sustain a recovery we could well head towards new multi-year lows towards parity.
GBPUSD – continues to range trade with resistance just above the 1.2500 area and support down near the 1.2330 area. The prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – has found support at the 0.8480 area and we could see a rebound while we remain below the 0.8630 area the trend remains lower towards the 0.8380 area. A move back through the 0.8630 area retargets the 0.8780 area in the short term.
USDJPY – the US dollar continues to gain ground breaking through the 110.00 area and looks to close in on the 112.40 area, which would be a 50% retracement of the 125.85/99.55 down move. For this to unfold we need to hold above the 110.00 area.
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