US markets finished the day lower yesterday, as once again US lawmakers played partisan politics on what should be a fairly straightforward economic aid package. Senate majority leader Mitch McConnell said that both parties were still trying to find a way forward, making it more complicated than it needs to be.
Markets here in Europe seem less concerned about that, as they look ahead towards events in Brussels and Frankfurt over the next few hours. The fact that UK prime minister Boris Johnson felt it worthwhile to travel to Brussels to dine with EU Commission president, Ursula Von Der Leyen, does offer some hope that there will be a positive outcome from what have been some tortuous negotiations. The meal certainly had a rather fishy feel to it, probably by design, with scallops, as well as turbot on the menu. Let’s hope it 'turbot-charged' the incentives to arrive at a deal.
More importantly, dreadful puns aside, is whether the meeting offered any new routes to a solution, which can be discussed at today’s EU Summit, and whether it can provide the catalyst for a framework on the contentious topic of the level playing field. Given how far apart the two sides appear to be, you’d have to be an eternal optimist to think so, yet we have a deadline looming that really ought to concentrate the minds of both sides, with talks set to resume and a new talks deadline of Sunday to avoid a no-deal outcome.
Yesterday German chancellor Angela Merkel set out the EU’s red lines, saying that Brussels would accept a no-deal outcome if the two sides could not figure out a way to overcome this key obstacle. What is becoming increasingly clear is that while there is an acceptance that there could be some level of regulatory divergence, it is the arbitration mechanism to resolve any issues that is at the core of the impasse, and where attention really needs to be focused. With time running out the urgency couldn’t be more immediate, with very little time to avoid a no deal scenario on 31 December.
This concern is likely to be at the forefront of the European Central Bank's thinking when they meet later today, and with diminishing room in their monetary policy toolkit for making a significant difference to what is already an accommodative monetary policy. The ECB has already expanded the size of its pandemic emergency asset purchase programme from €750bn to €1.35trn, as well as extending it into the middle of next year, when they met back in June.
At the time it was widely felt that this would be more than enough, however it didn’t account for the very real prospect of a second wave, which has seen economic lockdowns in France and Germany imposed through November, and now extended into next year, which has increased the pressure on the ECB to try and fill the gap when it comes to a lack of fiscal support, with the delays to the EU’s fiscal package likely to extend into 2021.
While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause. This is a problem for the ECB, particularly given the delays to the recovery fund. One thing the ECB could do is extend the PEPP by a further 6-12-months into 2022, an extension of QE, if you like, and possibly increase the amount by €500bn, but anything beyond that could see splits on the governing council, with a number of members pushing back against further large-scale stimulus measures.
Today’s meeting is also likely to be important in the context of trying to keep a lid on the euro, which has already broken above the 1.2000 area, and could well head towards the 1.2500 area in fairly short order. ECB president Christine Lagarde is likely to face a number of questions regarding this unwelcome rise, a problem that could well get worse if there is no EU-UK trade deal.
On the data front we also have the latest UK industrial and manufacturing production data for October. While services still make up the majority of the UK economy, the performance of the manufacturing sector in recent months has been fairly positive, registering gains in every month since May, though this pace of expansion has slowed somewhat as we have headed into Q4.
The third quarter was an especially positive, after a post-lockdown rebound helped reverse some of the worst of the losses in Q2. Nonetheless one thing the recent PMIs numbers have shown us is the resilience of the manufacturing and construction sectors in comparison to the services sector, which is much more exposed to tighter restrictions. Expectations for manufacturing and industrial production are for a continuation of the positive trend in place since May, however we are only looking at modest gains of 0.3% and 0.3% respectively.
We also have the latest UK monthly GDP for October, which is expected to show a rise of 0.4%, and a three monthly rolling average which is set to fall from 15.5% to 10.1%.
EUR/USD – currently trading sideways, and looking a little soft near the support at the 1.2060/70 level. While above this support and the 1.2020 area the risk remains for a move towards the next resistance sitting near the 1.2230 area, on the way to the 1.2550 area and 2018 peaks.
GBP/USD – after rebounding from the 1.3225 area on Monday, the pound moved above the 1.3420 resistance area yesterday, hitting 1.3480 before retreating. The 1.3500 remains a key barrier, and while below the risk is for a move back to the lows this week, and below that at 1.3100.
EUR/GBP – slipped back from the 0.9100 area yesterday, but once again found support at the 0.8980 area and last Friday’s low. A move above 0.9150 retargets the 0.9300 level, while below the 0.8980 area retargets 0.8860.
USD/JPY – continues to look for further weakness towards the November lows at 103.81, while below the broad downtrend resistance at the 104.70 area.