With US markets closed for Thanksgiving yesterday, today’s price action could well be a fairly subdued affair as we towards what looks set to be another negative week for European equity markets, as investors mull the prospect of possible next steps in the budget standoff between Rome and Brussels, and look forward to this weekend’s EU summit and next week’s G20 meeting, and trade talks between China and the US.

Having set into motion the process of “excessive deficit procedure” towards Italy the EU now runs the risk of its bark being worse than its bite if it now doesn’t follow through on its threats to sanction the Italian government for “serious noncompliance.” Unsurprisingly the rising tension appears to have translated into a reluctance on the part of retail investors to buy up Italian bonds, with yesterday’s retail bond sale only raising less than a third of what this type of sale would normally have raised.

For its part, the Italian government doesn’t look to be in any hurry to back away from a possible confrontation, emboldened perhaps by the fact that Italian yields remain at still fairly manageable levels.

None of that however changes the fact that, whatever plan the Italian government adopts, its own plans or any EU mandated plan, the Italian economy is underperforming and could contract in Q4. Neither party appears to have a plan to address that, let alone the problems in the Italian banking sector, which are already causing some discomfort elsewhere in the European banking system.

Italy isn’t the only economy in Europe experiencing a slowdown, today’s Q3 German GDP number is expected to confirm a contraction in economic activity of -0.2%, later this morning, while the latest flash manufacturing and services PMI’s for November for both Germany and France are both expected to show a modest stabilisation from the levels seen in October.

France manufacturing and services activity is expected to come in at 51.3 and 54.9, while Germany manufacturing and services is expected to come in at 52.3 and 54.6. This is likely to be of little comfort to those looking for a decent rebound in Q4.

It certainly presents a problem for the ECB, as they continue to prepare the markets for an end to the bond buying program at the end of next month, at a time when growth is slowing. While senior policymakers have been at pains to steer expectations away from the prospect of another TLTRO if economic conditions persist in remaining weak, the fact that they are being forced to play down the prospect suggest that it could well happen. It also makes the prospect of any rate rise next year pretty unlikely.

The pound had another decent day on reports that the EU and UK had come to an agreement on a framework for the future trade relationship between the two parties, a document which began as a 7-page addendum to the withdrawal agreement, but which now comes to 26 pages.

As a result, the prospect of a special EU Summit remains on the table for this Sunday, however the potential for problems remains high given some vocal opposition to some elements of the deal from Spain, France and other EU countries.

Irrespective of all that, none of it changes the fact that MPs on both sides of the Brexit divide in the House of Commons hate it, and for all the optimism of Prime Minister May about the withdrawal agreement and the political declaration, on the current arithmetic there still seems little chance of it getting voted through the UK Parliament.

In the US, there is likely to be quite a few eyes on the Black Friday sales numbers for the major retailers as US consumers start to gear up their plans for the run up to Christmas.

EURUSD – the failure to move up towards the 1.1500 area saw the euro slip back yesterday and could well argue for a retest of the 1.1280 level in the short term, with the potential to revisit the lows earlier this month. 

GBPUSD – continues to consolidate between key support near the August lows at 1.2650. While above here the recent range is likely to remain intact. Below 1.2600 could well open up a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2920 to stabilise and prompt a retest of last week’s peaks at 1.3075.

EURGBP – continues to struggle just below the 0.8940 area which remains a key resistance. As such we could slip back towards the 0.8820 area in the short term. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.

USDJPY – last week’s failure to retest the October peaks at 114.60 appears to have set up a bearish weekly reversal which could well precipitate further losses towards 111.80. While below 113.70 the bias remains for a push back to the October lows.

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