European markets had a disappointing session yesterday after the German economy slipped into contraction in Q3, with investors also keeping an eye on events in Italy, after the Italian government sent its budget back to the EU Commission with unchanged growth and deficit assumptions. Italian yields edged back higher again as investors mulled the prospect of an escalation in tensions between the EU Commission and Rome in the coming weeks.
US markets also finished the day lower again with tech stocks continuing their recent slide, while comments from Democrat Bill Pascrell that the recently agreed new trade deal between the US, Canada and Mexico would need changes made to it before it could be passed through Congress, raised concerns about whether the bill agreement would get ratified at all.
Oil prices underwent a welcome rebound on reports that OPEC ministers were mulling the prospect of production cuts of 1.4m barrels a day in order to help erode a supply overhang, caused by a softening of the market in the last few weeks. This supply overhang was reinforced by yet another huge build on US API inventories, of 8.79m barrels, well above expectations of 3.2m, the biggest build since February, and puts oil prices on course to record their sixth successive weekly decline.
Sterling traders had to endure another turbulent session yesterday as Prime Minister Theresa May tried to pull together the various disparate views of her cabinet in trying to sell the agreement with the EU over the thorny issue of the Irish border, as well as the outlines of the future trading relationship.
While she was able to achieve what she called collective approval from her cabinet to accept the deal, the gritted teeth consensus could well be tested in the coming days, and appeared to be reflected in her tired demeanour, almost as if to brace for the whirlwind that is about to come her way in the next few days, as various cabinet members come under pressure to resign. The Prime Minister herself could well also find herself subject to a leadership challenge if reports of letters going into the 1922 committee, are anywhere close to being accurate and come to a total of 48.
Having cleared this particular hurdle, the deal will now have to go to a special EU summit, later this month, before being put before the House of Commons in early December when the real fun is likely to begin, as the 585-page agreement is put before MP’s to vote on.
The Prime Minister went to great pains to state that whatever people’s feelings about the shortcomings of the deal, of which there are many, and how unsavoury some of the elements in it are to both sides, it was this deal, no deal at all, and no Brexit, though for the latter to happen the Article 50 notification would have to be revoked, something that is likely to be just as contentious as the current Brexit deal.
For some people “no deal” remains the preferred option, and while Labour have said they will vote the deal down, collective responsibility amongst some Labour MP’s hasn’t always been their number one priority.
On the data front yesterday’s inflation numbers were good news for UK consumers in that they stayed steady at 2.4%, with core prices also steady at 1.9%, welcome news at a time when wages growth continues to accelerate.
Today’s retail sales numbers for October are expected to show a slow start to Q4 after a disappointing end to Q3 which saw September post a 0.8% decline. Expectations are for a 0.1% rise as consumers rein in their spending ahead of what could be a pick up as we head towards year end, the Black Friday sales at the end of this month and the lead-up to Christmas.
The US dollar slipped back again yesterday after headline CPI came in at 2.5% for October, however core prices were a little softer, which against a back drop of stronger wage growth is also likely to be welcome news for US consumers. Retail sales are expected to reflect this with a rise of 0.6%m after a disappointing September.
Fed chair Jay Powell gave no indication in comments yesterday that he was concerned about how the US economy is performing and reiterated that the Fed would consider the case at how to adjust monetary policy at every meeting over the course of the next few months. There was no indication that he had any doubts as to the resilience of the US economy to the prospect for further rate rises.
EURUSD – appears to have found a base around the 1.1210 area, but needs to consolidate a move back through the 1.1350 area too argue for a bigger move towards 1.1500. The 1.1180 area remains a key support, with a break targeting a move towards 1.1000.
GBPUSD – continues to be buffeted by the conflicting winds of Brexit sentiment rebounding to 1.3050 yesterday, filling the 1.2950 gap, after finding support at the 1.2820 area earlier this week. A move through the 1.2820 area retargets the recent lows at 1.2680, while a move through 1.3050 retargets last week’s peaks at 1.3170.
EURGBP – hit a new six-month low yesterday at 0.8655 we’ve managed to rebound a little, however we’re currently capped at the 0.8780 area initially, as well as the 200-day MA at 0.8840. Bias remains towards the downside while below these key levels.
USDJPY – continues to find the air a little thin above the 114.00 area with larger resistance behind that at the October peaks at 114.60. Pullbacks are likely to find support at the 113.40 area and below that at the 112.80 area.
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