Overnight the Euro dropped to a six-week low as Sunday’s independence vote in Catalonia continued to unsettle the markets. EURUSD moved below 1.1700, and with Trump’s tax cut plans being revealed last week we could see a continued demand for the Dollar pushing EURUSD lower. The Catalan government has said it wants to avoid a traumatic split and has asked the EU to help mediate. The Catalan President, Carles Puigdemont, has said that Catalonia now has the right to be free from Spain but he has also indicated that this would not happen immediately. It is not clear what the Spanish government’s next move will be. Spanish Prime Minister Mariano Rajoy met other party leaders yesterday, but the government gave little sign it was open to talks as long as the Catalan government keeps pushes for full independence from Spain. Other options mentioned in the Spanish government’s response, have included the removal of Catalonia’s autonomous status, although it is not clear yet what steps it will take.

Yesterday, the US ISM Manufacturing survey, was considerably stronger than expected, rising to 60.8 from 58.8 (consensus 58.1). This takes the main index up to its highest level for over 13 years. Perhaps unsurprisingly given the two-point jump on the month, the underlying details were strong – new orders firmed to 64.6 (from 60.3); employment rose to 60.3 (from 59.9); and prices paid soared to 71.5 (from 62.0). The USD strength theme continues across the board as the Dollar Index, measuring the Dollar against a basket of peers, is up 0.3%.

The UK also released the first of three PMI readings yesterday. The Manufacturing PMI eased to 55.9 in September from 56.7 in August (Investec 55.3 Consensus 56.2). Cost pressures flared up in September – with input prices climbing to a 6-month high – due to a combination of rising commodity prices, the exchange rate and supply-chain pressures. Respondents reported passing on (at least some of) these increased costs to their clients – with factory gate prices being raised at the fastest pace in four months. Forward-looking business optimism remained positive in September (51% expected to raise production in the year ahead). However, supplier delivery times lengthened to the greatest extent for six-and-a-half years, with anecdotal evidence pointing to capacity constraints and some commodity shortages in food, plastics and steel. Should these supply chain issues fail to be resolved, survey compilers IHS Markit warned that a further moderation in manufacturing growth may be on the cards over the coming months. Sterling weakened following the release closing down over a cent against the Dollar and dropping below 1.1300 against the Euro for the first time in two weeks. 

Further afield, the Aussie Dollar has weakened overnight as the RBA left monetary policy unchanged. The RBA reinforced that growth and headline inflation may be slower than their forecast if the AUD continued to strengthen. RBA Governor said that recent data are consistent with the Bank's expectation that growth in the Australian economy will gradually pick up over the coming year.'

The week ahead

The UK releases the second of three PMI readings with the Construction PMI expected to remain at 51.1. At the same time the Bank of England’s Financial Policy Committee meeting record is released; this is expected to be watched closely for any clues on the tone of the upcoming November Financial Stability Report. Later the Eurozone releases its Producer Price Index, which is expected to see a small increase from 2% to 2.3% Y/Y. This afternoon we head to the States where FOMC member Jerome Powell will be speaking at 13:30 on ‘regulatory reform’.

Thought of the day

An unnamed boy in Argentina has been left honking with every breath he takes after he swallowed a party hooter which he can’t get out! The eight-year-old was taken to hospital by his parents who were worried when they couldn’t remove the accessory. Medics had to operate on the boy to remove the party hooter. While UK businesses don’t commonly deal with nations as far-flung as Argentina, here at Investec we do have the capabilities to deal in unusual currencies. So if you are dealing in some of the less common business areas around the world please give us a call on 0800 055 6339 with any currency related issues as it's likely we can help. For whistle and party hooter related enquiries we will have to pass!