European markets managed to shrug off yesterday’s poor start, as well as the prospect that barring a sudden change of mind, Germany could be heading towards new elections sometime next year, after the unexpected breakdown in coalition talks. It would appear that for now the buy dip mentality remains alive and well and in rude health.
While the DAX managed to recover to close higher, along with the rest of Europe’s markets the euro did come under pressure which in some respects helped support equity markets though the DAX rebound would also have been helped by the announcement by Volkswagen (DE:VOWG_p) that they would be investing billions of euros into electric vehicles over the course of the next five years with €14bn of the total sum going into German factories alone.
The UK economy is once again in the spotlight this morning ahead of tomorrow’s autumn budget when we get the latest public sector borrowing numbers for October.
These have shown a surprising resilience in recent months and on current numbers the Chancellor still looks on course to meet and even undershoot his borrowing targets for this year, not bad for an economy where it was predicted that Armageddon would ensue in the wake of last year’s Brexit vote.
Last month the budget deficit fell to its lowest level in September since 2007, as higher VAT receipts helped boost receipts during the summer months. Today’s October public sector borrowing numbers are expected to show a modest increase from September’s £5.3bn to £6.6bn, which while still better than a year ago takes the overall debt ever closer to the £2trn level.
Today is also likely to be instructive in terms of the overall discussion over the Bank of England’s recent decision to raise rates later this morning when the following MPC members testify to the Treasury Select Committee of MP’s in respect of the recent November inflation report, with Governor Carney managing to give this one a miss.
In particular we’ll look to get to fully understand the reasoning of external members Messrs Gertjan Vlieghe, Michael Saunders and Ian McCafferty as to their reasons for reversing last year’s base rate cut, while we already know why Deputy Governor Jon Cunliffe dissented from the overall decision, due to concerns about the lack of wage growth.
Having missed out on a second term as Fed chief Janet Yellen decided to draw a line on her tenure at the central bank announcing her resignation yesterday from the board of governors even though she could have remained in position until 2024 under current rules.
This also means that President Trump will have to fill another vacant position next year, bringing the total back to four, the vice chair position as well as other three board members, after the recent appointment as Jerome Powell as Yellen’s successor.
How these changes will potentially affect Fed policy next year is going to be particularly tricky and should not be underestimated? While regional Fed Presidents get to vote on a rotational basis the permanent Fed governors get a vote at every meeting. Their views on monetary policy are going to be important and carry a lot of weight.
Will the candidates who missed out on the top job like John Taylor and Kevin Warsh stay in the frame for the remaining jobs, or will we see a string of new candidates?
EURUSD – the 1.1710 area appears to be holding for now but while below 1.1820 the risk is for a move towards the 1.1650 as well as the November lows. A move above yesterday’s peaks argues for a return to the October peaks just below 1.1880.
GBPUSD – the last five days has seen higher lows and higher highs but we still remain below the larger resistance at the 1.3320 area, which means we could see the pound slip back towards the 1.3150 area. Only a move below 1.3120 opens up the prospect of a retest of the range lows at 1.3030. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – continues to slip back with the risk that we could see further losses towards 0.8820 and the November lows at 0.8735. We need to see a move back above the 0.8940 level to argue for a return to the 0.9000 area.
USDJPY – appears to have found a short term base near the 111.80 level just above the 200 day MA, but we need to see a move back through the 113.20 area to argue for a return to the recent range highs above 114.00.
FTSE100 is expected to open 3 points higher at 7,392
DAX is expected to open unchanged at 13,058
CAC40 is expected to open unchanged at 5,340
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