19 Jan 2018

Market Brief: US government shutdown concerns grow

James Dazeley

Dealing team

The US dollar continued its recent weakness yesterday with concerns of a US government shutdown looming.

Today's data release
  Key levels
09:30 UK retail sales   Support Resistance
15:00 Michigan consumer sentiment (Jan) GBP/ USD 1.3657 1.4013
18:00 Fed Vice-Chair Quarles speaks GBP/ EUR 1.1207 1.1508
18:30 San Francisco Fed's Williams speaks      
Market overview

A stop-gap bill that would see the government funded through to 16 February has passed through the House of Representatives but will still need to get the potentially tougher approval from the Senate. As such, a federal government shutdown still appears to be a distinct possibility after Senate Democrats pulled together against the House's stop-gap bill proposal, announcing they would not back it.

 

By Thursday evening, at least ten Senate Democrats who had voted for a previous stop-gap spending bill to allow it to pass the Senate in December said they would not support the latest proposal. With at least two Senate Republicans also opposed that leaves the bill short of the 60 votes needed to pass the Senate. Remaining hopes of an immediate government shutdown being avoided now appear to rest on the Democrats' proposal of an spending bill extension of just a few days, but even that would only kick the can a matter of days. If the government is forced into a shutdown after tonight, this would be the first such incident since 2013. That shutdown lasted 16 days. Republicans and Democrats are struggling to get a long-term deal over the line because of a dispute regarding how to protect “Dreamers”, young people brought to the US illegally as children. For this stopgap bill, the Republicans included support for Children's Health Insurance Program (CHIP).

 

As a result of the dollar weakness, GBP/USD was up 0.46% yesterday whilst EUR/USD was up 0.43%. With that in mind, GBP/EUR was only up a touch.

 

Data-wise yesterday we saw Initial Jobless Claims come in better than expected at 220,000 (250,000 expected), its lowest level since 1973. That being that said, the week in question, between two holidays, tends to lead to volatile data. This was the 150th straight week that the figure came in below the 300,000 threshold which is linked to a strong labour market. In addition, the US housing data was a mixed bag whilst the Philly Fed data came in below expectations falling to 22.2 from 27.9 in a previous month.

 

With regards to the ever-present Brexit, we heard from Emmanuel Macron yesterday in relation to a tailored deal for the City. He insisted that the UK would not be allowed full access to the EU markets, including financial services, unless it accepts EU rules and jurisdiction and contributes to the budget. This will be a point of interest later in the year when negotiations regarding the UK’s exit from the EU start formally start. Elsewhere in European politics Germany’s Social Democrats are voting this weekend on a coalition deal with Angela Merkel’s Christian Democrat-led bloc.

 

The day ahead

In the UK we’ll be eagerly watching December’s retail sales figures due at 09:30. A decline of 0.6% is expected month-on-month after a very strong November which was boosted by Black Friday events. A negative growth rate month-on-month would be in line with the same period in previous years. Further afield we get the Michigan Consumer Sentiment Index (Jan) from the US at 15:00 and various FOMC voting members speaking throughout the day. All the while we will be watching what happens in the US with regards to the potential government shutdown.

 

Thought of the day

Tiger Woods, arguably the greatest golfer of all time, certainly the most talented, is making a comeback. On the 25th of January he will line up at Riviera Country Club in Los Angeles for the Farmers Insurance Open. For the man who redefined golf in the 1990s, it will be the first tournament of the year and only his second tournament since spinal fusion surgery last April. I am extremely excited to see how this comeback pans out, it could be the most exciting thing in golf for many a year, seeing the old legend battle it out against the exciting bunch of young talent (Jordan Spieth, Dustin Johnson, Rory McIlroy, Ricky Fowler et al.) All of this being said, one cannot ignore the fact that Tiger’s comeback might end in tears. His recurring back injury is a major concern and his swing has had to change to adapt to the injury. One cannot but feel that there are analogies between the Pound’s comeback this year and Tiger’s – whilst one can get carried away with the Pound’s recent strength, it’s having to adapt its ‘swing’ to an ‘injury’ of its own …. the doom and gloom side of the Brexit equation! Like Woods, we all know how far the Pound has fallen (and therefore how far it can still rise!) – 2018 could certainly be the year we find out whether both can reach their lofty heights once again! 

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