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)