19 Oct 2017
Market Brief: Can EU Summit deliver any progress?!
Yesterday morning’s labour market data showed that the unemployment rate remained unchanged at 4.3% in the three months to August, in line with both consensus and Investec expectations.
|Today's data releases
|09:30||UK retail sales||Support||Resistance|
|13:30||US initial jobless claims, continuing claims||GBP/USD||1.3012||1.3338|
|13:30||US Philadelphia Fed business outlook||GBP/EUR||1.1064||1.1438|
|14:30||US Fed's George speaks in Oklahoma|
Yesterday morning’s labour market data showed that the unemployment rate remained unchanged at 4.3% in the three months to August, in line with both consensus and Investec expectations. Meanwhile, headline earnings growth was a touch higher than expected at 2.2% 3m y/y (consensus: 2.1%), as was pay excluding bonuses at 2.1% 3m y/y (consensus 2.0%). Sterling initially saw some modest upside to the earnings data, with the chances of a November rate hike judged to be marginally more likely on the back of it, only to erase the gain to hit an intraday low of $1.316.
Today marks the start of the two day EU Summit and what Theresa May would have hoped to have been the point at which Brexit negotiations moved decisively ahead. Instead, the prospects of agreeing to begin crucial talks on the transition and future trading arrangements will likely be thwarted by the tough line taken by the EU on the divorce bill. May wants negotiations to move on to the future relationship and hopes to discuss how to make quicker progress during the meal in Brussels today. While the EU is also keen to make progress, officials say the U.K. hasn’t done enough to translate the concessions of May’s speech in Florence last month into concrete pledges. It intends to postpone a decision on May’s key demand until December, and even then there’s no guarantee, although it is thought it will begin internal preparatory work on trade arrangements, providing a nod to recent British efforts to expedite the talks. A senior EU diplomat, speaking on condition of anonymity, said he saw the chances of starting trade talks by year-end as only 50-50. Failure then would leave the U.K. with just months to settle its future relationship with its biggest trading partner, and increase the risks of crashing out without a deal.In what could also be the beginnings of a seismic separation, Catalan President Carles Puigdemont has until 10am local time today to renounce his claims to independence for Spain’s biggest regional economy. Anything less, and the central government will start the process of taking direct control of the regional administration under Article 155 of the Constitution, Deputy Prime Minister Soraya Saenz de Santamaria told lawmakers in Madrid yesterday.
This week has also seen China hold the 19th congress of the Communist party which marked the formal start of Xi Jinping’s second five year term. Alongside this, China reported economic data which showed that the quarterly GDP growth pace at 1.7% (q/q) and 6.8% (y/y), in line with consensus expectations. That represented a slight slowing on the (revised) 1.8% (q/q) reading for Q2 (6.9%), but that still left China well on track to exceed its current growth goal for the year of 6.5%. The congress included a very long (3.5 hour) speech from President Xi, one which did not mention long-term targets for the size of the economy or per-capita GDP. Some are suggesting that this might be a sign that the government will be increasingly happy to accept lower growth outturns going forward as it presses on with structural reforms. Asian markets are mixed this morning following the data and yesterday’s political events, with the Shanghai Composite down 0.3%.
The day ahead
Continuing the run this week of important UK data, the figure for Retail Sales for September is out at 9.30am. This indicator of consumer spending has been notably resilient over the past couple of months, bearing in mind the squeeze on consumer finances brought about by a combination of higher inflation and subdued wage rises. Indeed, July’s sales rose by 0.6% on the month and August’s by 1%. A slight dip in the number is expected so a positive number could see support for the pound.
Thought of the day
Today marks the 30th anniversary of Black Monday where stock markets around the world crashed. Dow, S&P 500, FTSE, DAX and CAC fell -23%, -20%, -11%, -9% and -10% respectively. The FTSE fell a further 12% the day after perhaps reflecting the difficulties in fully reopening the market after the great storm a few days before. What was happening before the crash? In late 1985 and early 1986, the United States economy began shifting from a rapidly growing recovery from the early 1980s recession to a slower growing expansion, which resulted in a brief "soft landing" period as the economy slowed and inflation dropped. The stock market advanced significantly, with the Dow peaking in August 1987 at 2,722 points, or 44% over the previous year's closing of 1,895 points. Further financial uncertainty may have resulted from the collapse of OPEC in early 1986, which led to crude oil price decreasing by more than 50% by mid-1986. A popular explanation for the crash was that initial falls were intensified by computerised selling. In recent history, we’ve had a recession, slow recovery, low inflation, falling oil prices, political uncertainty and a number of stock markets have broken record highs. Furthermore, computerised selling sounds very much like high frequency and algorithmic trading. Will history repeat itself? There are certainly quite a few resemblances! However one can argue that despite all the difficulties markets have remained remarkably resilient and therefore history does not have not necessarily repeat itself. To discuss the current market uncertainties and how you can hedge yourself against adverse currencies movements, calling the Investec FX team today on 0800 055 6339.