Market Review – Fundamental Perspective

[PCMNewsdesk]

• Equities mixed as the rally from Sino-US trade seemingly halted
• USD under pressure as a part of the US Treasury yield curve inverted
• GBP was under pressure yesterday amid negative Brexit sentiment

US equities traded higher yesterday, while their Asian counterparts saw a mixed performance overnight as media appearances with US officials shed little light on the specifics of how the Sino-US trade negotiations will progress, with economic adviser Kudlow dialing back expectations (Bloomberg)
The Bloomberg USD Spot Index fell overnight pressurized by a drop in Treasury yields across the curve. Focus is on the news that three-year Treasury yields have climbed above five year ones, potentially foreshadowing an end to the Fed’s tightening cycle (Bloomberg)
CNY, AUD and NZD were marginally higher versus the USD overnight as the trade-dependent currencies are still seeing benefit from positive news in the Sino-US negotiations (Bloomberg)
GBPUSD dropped to below 1.2700 at one point yesterday as uncertainty over Brexit failed to subside. Yesterday, opposition parties were granted an emergency debate on whether PM May’s government is in contempt of Parliament for refusing to release the legal advice underpinning her deal (Bloomberg)
Headline risk remains, with focus now on the five-day Brexit debate in the House of Commons, due to commence today
Also in focus, BoE’s Governor Carney testifies before Parliament at 9:15 GMT today, likely being challenged over assumptions that monetary policy will tighten in response to a surge in inflation if there is a hard Brexit, with rates predicted to peak by 1.75% - 5.5% as GDP falls (Bloomberg)

[PCMNewsdesk]

• S&P 500 fell by 3.2% yesterday amid trade and economic worries
• GBPUSD hit new YTD low amid Brexit turmoil for the Government
• Markets will watch UK PMI today as well as Chancellor Philip Hammond in Parliament

Global equities were in the red yesterday and overnight on concerns over trade and worrying signals from the bond market (FT). The partial inversion of the US Treasury yield curve this week has resulted in worries about a potential recession (Reuters)
In FX, the Bloomberg USD Spot Index traded higher overnight after dropping initially yesterday on the back of lower Treasury yields
Sterling had a turbulent day of trading yesterday. The catalyst of the initial gain was when the Advocate General to the ECJ opined that Britain could revoke its planned withdrawal from the EU without member state approval. However, GBPUSD dropped sharply to YTD lows of 1.2659 as the Government was found in contempt of Parliament over failing to release the Brexit legal advice
While the Government will respond to the decision today, the actual legal advice will be released at a later date to be confirmed (FT)
Headline risk will likely remain elevated today and in coming days ahead of Parliament’s vote on the Withdrawal deal on 11th December
Elsewhere, AUDUSD had its biggest fall in two weeks overnight after GDP growth missed economists’ forecasts. GDP expanded 0.3% last quarter, compared to a consensus of 0.6% (Bloomberg)

[PCMNewsdesk]

• Asian equities and US stock futures fell overnight after the arrest of a Huawei executive
  
• Brexit headlines continued to drive GBPUSD volatility
  
• CAD dropped sharply against the USD on a dovish BoC meeting
  

Asian equities and US stock futures dropped overnight as Sino-US tensions escalated with the arrest of the CFO of the Chinese technology company Huawei in Canada. She may now be extradited to the US, reportedly in relation to violating Iran sanctions (FT)
In FX, the Bloomberg USD Spot Index made moderate gains despite US equity and bond markets being closed yesterday to honor former President George H.W. Bush
GBPUSD had another volatile day of trading yesterday ahead of the Withdrawal vote next Tuesday. According to a report by the Telegraph, the EU is ready to discuss an extension of Article 50 if the deal is voted down on Tuesday. Further pressure came from news that UK ministers are urging Theresa May to delay next week’s vote amid fears that defeat could be so catastrophic that it brings down the Government (The Times)
Our traders see GBPUSD support at 1.2660 and resistance at 1.2800. EURGBP finds short term support at 0.8875 ahead of 0.8800 while resistance lies at 0.8950
CAD dropped to its lowest level since June 2017 versus the USD after yesterday’s dovish BoC meeting. The committee left interest rates unchanged and expressed concerns about a potentially weaker energy sector which could imply further non-inflationary growth
Elsewhere, AUD fell against the greenback for a third day after trade data missed estimates

[PCMNewsdesk]

• European equities dropped significantly yesterday amid concerns about Sino-US trade tensions
• Fed’s Powell delivered a bullish statement ahead of today’s labour report at 13:30 GMT
• Brent prices fell below $60/ barrel yesterday after OPEC ended talks without a deal on oil production

EMEA equities suffered their worst day since the 2016 Brexit vote as the arrest of Huawei’s CFO sparked concerns over the Sino-US trade truce (FT). In FX, the Bloomberg USD Spot Index reached its highest point in December yesterday, before falling to reverse all gains
Fed Chairman Powell delivered a bullish statement of the US economy and the job market. Today’s focus is on the US labour report at 13:30 GMT
GBPUSD made gains yesterday, but erased some of these in early morning trading as Brexit uncertainty weighs on Sterling. PM May is reportedly considering a delay to next week’s Brexit vote on the advice of senior Tory MPs, however such a possibility has previously been ruled out by Downing Street (The Times). Markets will watch this weekend’s headlines closely
Brent prices fell below $60/ barrel yesterday as OPEC ended talks without a deal on oil production for the first time in nearly five years, as Russia refused to commit to the big output curb that Saudi Arabia is demanding (Bloomberg)
In Germany, the CDU Party congress will vote on a new party leader today, replacing Angela Merkel after 18 years as head of the party. In theory, Merkel remains Chancellor until the General elections in Sept-2021, however potential tensions with the new CDU party leader could prompt earlier changes to Germany’s political landscape
The results will likely be announced after market close today or even tomorrow morning

[PCMNewsdesk]

• Global equities under pressure amid worsening Sino-US relations
• GBPUSD volatile ahead of key Parliament vote tomorrow
• Markets will also watch the ECB at their meeting Thursday

Global equities traded lower last week amid worsening Sino-US relations and general negative risk sentiment. Tensions escalated over the weekend as Beijing summoned the American Ambassador to protest the arrest of Huawei executive Meng Wanzhou (Bloomberg)
In FX, the Bloomberg USD Spot Index was broadly flat week on week after extending losses on Friday amid lower-than-expected US jobs data (Consensus: 198k, Actual: 155k)
GBPUSD ended the week in roughly the same position it started in, despite trading in a wide range ahead of the key Parliament vote on the Withdrawal Agreement tomorrow. Some ministers still expect the vote to be delayed, according to a Times report. However, if the vote goes ahead, the results are expected to come out around 22:00 GMT
A large rejection is widely expected, with more than 100 Tory MPs having publically announced they oppose the deal (FT)
Should the vote be successful, Barclays Research see spot rallying aggressively
This week is also important for EUR, as the ECB is set to explain how they plan to support the economy after the end of Quantitative Easing, which is set to end at the meeting Thursday. E19 growth was at its lowest level in four years in the fourth quarter, with many economists predicting that its third largest economy, Italy, is heading for a recession (FT)
Elsewhere, in further risks to global growth, economic data for China released over the weekend signal a further weakening of both domestic and international demand in November, CPI and import growth slowed, as well as export growth caused mainly by US tariffs (Bloomberg)

[PCMNewsdesk]

• GBPUSD reached YTD lows on cancellation of Parliament’s vote on Withdrawal deal
• Most Asian equities continued to be under pressure
• USDINR jumped after India’s central bank governor resigned overnight

GBPUSD lost c.2% reaching YTD lows of 1.2507 in the worst day for Sterling since the 2016 referendum as the Government cancelled the key Parliament vote on the Withdrawal Agreement in order to avoid a devastating defeat. Theresa May is back in Europe today to get more concessions on the controversial backstop (Bloomberg)
Any new vote is not likely to be held until January, as Parliamentary recess begins on 20th December (Bloomberg)
Our traders see 1.2660 – the prior YTD low – as the new resistance level
US equities closed higher yesterday after a volatile session, however their Asian counterparts saw a more subdued performance amid ongoing worries about Sino-US trade tensions. The bail hearing of Huawei’s CFO resumes today which could see further headline risk
Chinese stocks gained however further to the news that US and Chinese officials are reportedly still having discussions regarding trade (Bloomberg)
In FX, JPY made gains overnight as investors looked for safe-haven currencies
In India, equities dropped overnight and USDINR jumped by more than c.1.5% after the surprise resignation of its central bank governor, Urjit Patel (Bloomberg). Further pressure comes from early trends from a vote count indicating that that PM Modi could lose power in at least two major states (Bloomberg)

[PCMNewsdesk]

• A vote of confidence has been triggered against PM May
• The vote will be held between 18:00-20:00 tonight with the results announced “as soon as possible” afterwards
• Sino-US trade tensions eased

GBPUSD briefly fell below 1.2480 this morning after a leadership vote against PM May was announced by Graham Brady, the senior Conservative Party official who runs the leadership process. A simple majority of Conservative MPs is required in order to replace May, but if this is not reached, she cannot be challenged for another year. Markets will watch any further information that comes out today
The vote will be held around 18:00-20:00 GMT tonight and an announcement will be made “as soon as possible in the evening” on the outcome (Bloomberg)
For now, Prime Minister’s Question Time is expected to still take place at 12:00 GMT
EMEA equities made gains yesterday, with APAC equities following suit after signs that the Sino-US trade dispute may be easing. Sentiment improved on reports that China considers cutting import tariffs on American-made cars from 40% to 15%, and US President Trump announcing that he was willing to meet China’s Jinping again and intervene in the Huawei case (Bloomberg)
In FX, USDJPY hit one week highs as demand for safe-haven currencies waned, after further positive news that the Huawei executive was granted bail
Elsewhere, India announced a new Governor for the RBI after Urgit Patel resigned. USDINR briefly rallied on the news, likely because of concerns over the central bank’s independence under the new governor, a former bureaucrat (Bloomberg)
Markets will watch the US CPI data today, where a slowdown in headline inflation would reinforce speculation of fewer hikes from the Federal Reserve. Barclays Research expect headline CPI to have been flat on the month and to have increased 2.2% y/y

[PCMNewsdesk]

• Theresa May won Confidence Vote, with 200 in favour and 117 against
• Global equities made gains on easing Sino-US tensions
• Markets will watch the ECB meeting today at 12:45 GMT

GBPUSD reversed some of its recent losses yesterday ahead of the Confidence Vote against PM May, as investors demonstrated confidence that she would win. The result, announced at 21:00 GMT, revealed that 200 MPs voted in favour of the PM but 117 voted against her, which was at the higher end of market expectations. Sterling saw limited reaction post the vote
Given May has won the confidence vote, she cannot be challenged for another year
Speaking to a group of MPs ahead of the vote, PM May announced that she would not run in the 2022 election (BBC)
Focus now is on today’s EU Summit where May will meet with European leaders to discuss the Withdrawal deal further and address concerns about the Northern Ireland backstop. Headline risk remains elevated until Parliament rises for Christmas recess on 20th December
Global equities were in the green, with positive sentiment from the confidence vote carrying over into Asia overnight. Asian equities also made gains on positive Sino-US trade sentiment, with signs of easing tensions, as Chinese state-owned companies purchased 1.5 million tonnes of US soybeans in the first major purchase in more than 6 months (Reuters)
EURUSD gained yesterday as Italian PM Conte proposed a 2.04% budget deficit to Europe, down from the already rejected 2.4%. Today markets will watch the ECB meeting at 12:45 GMT, where a rate hike is not forecasted but ECB President Draghi is expected to end the ECB’s Quantitative Easing programme
Barclays Research think that “markets are priced for a dovish end of QE at Thursday’s ECB meeting, leaving scope for a temporary squeeze higher in the EUR if communication appears balanced”

[PCMNewsdesk]

• Asian equities closed today’s session in green, but more caution kicked in as Europe joined trading
• Trading in the EUR/USD cross rate was an area of calm of late and the ECB policy and press conference were not able to unlock the EUR/USD stalemate
• USD is weakened against the major currencies after the ambiguous economic reports

Asian equities closed today’s session in green, but more caution kicked in as Europe joined trading. With no economic data to steer traders, EU equity indices alternate in green and red throughout the day. The German Bund moved sideways awaiting the ECB rate decision and president Draghi’s press conference afterwards. The ECB didn’t alter its policy rate (as widely expected). President Draghi said that risks remained “broadly balanced”, but added this time that the balance of risks is moving to the downside
Trading in the EUR/USD cross rate was an area of calm of late and the ECB policy and press conference were not able to unlock the EUR/USD stalemate. The ECB slightly revised down the 2018 and 2019 growth forecast. The ECB president described the risk to the outlook as broadly balanced, but moving to the downside. Draghi summarized the ECB assessment as ‘continuing confidence with increasing caution’
USD is weakened against the major currencies after the ambiguous economic reports. The Consumer Price Index in November did not grow while the experts expected 0.1%. The basic Consumer Price Index remained at 0.2%. The pressure on the USD is put by the Federal Reserve deciding to increase the key interest rate next year. The investors are waiting for the final decision from Federal Reserve which should be released next week. The USD index (#DX) closed in the red (-0.35%)

[PCMNewsdesk]

• Global equities traded broadly higher last week amid easing trade tensions
  
• Brexit concerns weighed on GBPUSD on Friday
  
• Focus is on the Fed’s rate decision on Wednesday
  

Global equities broadly gained last week amid positive Sino-US trade sentiment, although US and European stocks closed in the red on Friday. Asian stocks have traded marginally higher overnight ahead of an important week for global data
In FX, the Bloomberg USD Spot Index made strong gains last week rising c.1.2% to YTD highs. EURUSD dropped below 1.1300 to a low of 1.1270 on Friday amid disappointing Euro Area PMIs
Barclays Research thinks that “French political upheaval has likely added to the already biting trade tensions, weaker global macro backdrop and automotive weaknesses”
GBPUSD traded to a low of 1.2530 on Friday as PM May returned from Brussels without any breakthrough in Brexit negotiations. Tusk indicated he has “no mandate to organize any further negotiations” (FT)
With Parliament breaking up for Christmas ‘Recess’ this Thursday, May is under pressure from senior Parliament members to end the current Brexit deadlock through a Parliamentary vote (Bloomberg). Headline risk is likely to remain elevated
In the US, the November retail sales report was stronger than expected, particularly at the core level, and industrial production also registered a solid overall gain in November. This week’s focus is on the Fed meeting on Wednesday evening
Barclays Research thinks that “a hike is widely expected (and about 80% priced), but the outlook for next year appears clouded by concerns of US deceleration, slowing global growth and trade conflict risk