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The resilience in financial markets to be able to absorb and adjust to surprises this year has been quite surprising in a lot of respects. Having largely put the unexpected Brexit vote and Trump victory behind them, the Dow once again put in yet another record high yesterday.

European markets were able to finish the day higher across the board, along with the euro though the Italian markets did finish lower largely as a result of a weaker banking sector, and also look set for a fairly positive open this morning as well, though the FTSE100 may open slightly lower.

Having spent most of the past few weeks obsessing about the outcome of last weekend’s Italian referendum vote outcome investors pretty soon put that behind them as well in a matter of minutes.

A large part of that was down to the fact that the outcome was widely expected unlike the previous two which were not, so in a sense it’s not that surprising that markets were able to adjust more quickly to the end result, than they were to the summer Brexit vote and Donald Trump’s surprise win in the US Presidential election.

Nonetheless while the outcome of the Italian referendum vote wasn’t too much of a surprise it does still tap into a familiar theme of a rising dissatisfaction amongst voters towards politicians who appear detached from the people they are supposed to serve?

In any event Italy’s problems are no more or less serious with Renzi’s departure than they were beforehand, in fact they won’t make the difficult decisions that need taking any easier to take in the context of sorting out Italy’s sclerotic banking sector.

Any new government technocratic or otherwise is still faced with the unenviable task of either bailing in the Italian banking sector and wiping out a wave of Italian pensioners and savers, or defying Brussels and trying to bail the banks out with taxpayer’s money in contravention of new rules to protect taxpayers.

As it is the recapitalisation plan for Monte dei Paschi di Siena is much more problematic now that Renzi has gone given the uncertainty that is likely to come next as we await the shape of any new administration.

No one in their right mind is likely to invest in a bank that has already been bailed out three times in the last few years against such an uncertain political backdrop.

One thing is certain the events of the last few days make it likely that we will see the ECB extend its asset purchase scheme by at least another six months, beyond March 2017 when they meet later this week.

The pound also had a decent day finally recovering all of its flash crash losses, as the next stage of the Brexit court hearing started in earnest yesterday at the Supreme Court. With no judgment due until January it seems easier to focus on the economic fundamentals for now which still appear to be holding up well and once again appear to reinforce the hastiness of the August decision by the Bank of England to cut rates further as well as add further QE.

Yesterday’s UK services PMI for November came in well ahead of expectations hitting a ten month high of 55.2 which along with some decent construction and manufacturing numbers augur well for a similarly robust Q4, in the way that Q3 was also pretty decent, though higher inflation looks increasingly likely more so now that oil prices have continued to rise in the wake of last week’s OPEC decision, with Brent prices hitting their highest levels this year yesterday.

November retail sales from the British Retail Consortium also showed an increase of 0.6% a decrease from the 1.7% gain seen in October, with the slowdown no doubt coming about as a result of the fact that Black Friday and Cyber Monday were towards the end of the month, which may have deferred some spending. 

Even the European economic numbers are holding up quite well, no doubt helped by the fact that both the pound and the euro have been quite weak in recent months, largely as a result of a resurgent US dollar which does appear to now be showing some signs of exhaustion ahead of next weeks Fed meeting.

Last night’s comments from St. Louis Fed President James Bullard are likely to be the last from any Fed officials as we head into the black out period and here he did nothing to dilute expectations of a move on rates next week.

EURUSD – having failed once again to push below the lows last year the euro has managed to rebound, pushing through the 1.0730 area, and potentially extending towards the 1.0870 level. A move below 1.0460 could well be the catalyst for a move towards parity and a retest of levels seen at the beginning of the century.

GBPUSD – the move towards the 1.2880 level remains on track after pushing through the 1.2530 area last week. Pullbacks should now find support down near the 1.2520 area. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.

EURGBP – found support down near the 200 day MA, just above the 0.8280 level before rebounding. The current rebound could well extend back towards the 0.8500 area, with a break retargeting the 0.8600 area.

USDJPY – currently finding some resistance just below the 115.00 level. The main resistance sits up near 115.60 and the 61.8% retracement of the 125.85/98.95 down move. Below 112.40 argues for a retest of the 111.20 area.

 

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