No-Brexit speculation leaks from FX to equities
UK services-sector PMI declined well below consensus forecasts at 50.4 for November; the weakest for over two years and only a marginal expansion in activity. Blame was mainly pointed at Brexit uncertainty, which was cited as a major factor and reinforced expectations of subdued fourth-quarter GDP growth. Market reaction was limited in light of the current political discussions.
The Brexit debate continued to contribute to increased speculation that Brexit may not even happen which triggered an element of short covering. The government may attempt to improve the backstop component, but there was an overwhelmingly negative reaction to the full legal advice, hardening opposition to the agreement. The equities markets are also starting to price in the increased chances of remaining in the European Union after all. Sterling struggled to sustain significant gains as underlying sentiment remained fragile. The Euro closed just above 1.1235 and the Dollar below 1.2750.
The Dollar has recovered from its recent lows somewhat. The weakness came off the back of two-year and ten-year Treasury bond yield curves running the risk of inverting. After Trump declared a temporary truce with China on trade tariffs following the G20 Summit, the Greenback recovered as worries over economic growth abated.
In other news, the US-China trade truce has come under scrutiny as of late following comments by President Trump (as expected).
The key focus will be on the Federal Reserve (Fed) Chair Jerome Powell’s scheduled speech tomorrow, which will be closely scrutinized for the central bank’s near-term monetary policy outlook, especially after last Wednesday’s comments, saying that interest rates were nearing neutral levels. Should Powell put more emphasis on the rising risks to the US economy, investors will be forced to rethink possibilities of a pause in the rate hike cycle in 2019 and eventually trigger a fresh leg of a downfall in the Dollar.
Eurozone services-sector PMI edged up slightly as the Italian data improved to show fractional growth, although the growth outlook remained fragile. The Euro edged higher before the US market opened although market moves were limited. European Central Bank (ECB) sources suggested that the central bank was discussing ideas to gradually withdraw monetary stimulus next year, one of which is to raise only the deposit rate at first. Expectations of extreme caution in raising rates limited Euro support.
After hours reports surfaced that Italian Prime Minister Conte would make new proposals on the 2019 budget and the Euro settled below 1.1350.
Data to watch:
24HR USD OPEC meeting
00:30 AUD Exports (Oct)
00:30 AUD Trade balance (Oct)
00:30 AUD Retail Sales s.a. (MoM) (Oct)
01:15 USD Fed’s Quarles speech
09:05 AUD RBA Assist Gov Debelle Speech
13:15 USD ADP Employment Change (Dec)
13:30 USD Trade Balance (Oct)
13:30 USD Continuing Jobless Claims (Nov 23)
13:30 USD Initial Jobless Claims (Nov 30)
13:30 USD Nonfarm Productivity (Q3)
13:30 USD Unit Labor Costs (Q3)
13:30 CAD International Merchandise Trade (Oct)
13:50 CAD BoC Governor Poloz Speech
14:45 USD Markit Services PMI (Nov)
14:45 USD Markit PMI Composite (Nov)
15:00 USD ISM Non-Manufacturing PMI (Nov)
15:00 USD Factory Orders (MoM) (Oct)
15:00 CAD Ivey Purchasing Managers Index s.a (Nov)
15:00 CAD Ivey Purchasing Managers Index (Nov)
17:15 USD FOMC Member Bostic speech
23:30 USD FOMC Member Williams speech
23:30 JPY Overall Household Spending (YoY) (Oct)
23:30 AUD AiG Performance of Construction Index (Nov)
23:45 USD Fed’s Powell Speech