Markets remain resilient…for now
The Dollar was subjected to heavy selling pressure during the early hours of Wednesday as Trump’s victory unfolded. There was a sharp reversal during the day as the US currency made strong net gains. Futures prices indicate at least a 70% chance of a rate hike in December. Expectations of expansionary US fiscal policy, tax cuts and legislation to encourage corporate funds back onshore will all support Dollar strength.
San Francisco Fed President Williams stated that it still made sense to raise rates gradually and comments from officials will be monitored closely in the short term. According to Trump advisers, there would be no move to call for Chair Yellen’s resignation, although she would probably not be nominated for a second term.
The UK goods trade deficit widened to £12.7bn for September increasing by £1.6bn from August. Within the figures, exports decreased and imports increased showing the weak Pound has yet to feed through. This maintained concerns surrounding the long-term structural outlook. The Euro declined to lows below 1.1363 against the Pound for the first time since the October flash crash and the Pound held above 1.2400 against the Dollar.
The UK political negotiating position with the EU could be stronger following Trump’s election as the President-elect may have a more sympathetic attitude towards trade policies, although uncertainty has prevailed. The UK RICS house-price index increased to 23 from 18 previously with an increase in demand for the second successive month.
The EU announced yesterday that Eurozone growth will slow next year due to increased political uncertainty, including Britain’s Brexit vote, and weakening global trade. Forecasts for 2017 have been cut to 1.5% from 1.7%, although a minor improvement to 1.8% has been predicted for 2018.
Following the surprise US election upset, expectations of renewed political stresses in the Eurozone caused by December’s Italian political reform referendum have risen. The Italian PM Matteo Renzi has promised to leave office if the public reject his reforms which may increase the chances of the Euro-Sceptic 5 Star Movement gaining power.
A strong net improvement in risk appetite also undermined the Euro and the currency retreated sharply to lows just above the 1.0900 level. The Euro consolidated around 1.0950 at today’s market open with markets braced for further volatility given a very high level of uncertainty.
Data to watch: 1.30pm US Initial & Continuing Jobless Claims. 7pm US Monthly Budget Statement.