Just when you thought it was time to expect the sky to fall and the seas to boil, a break in right wing, populist events brings us the Austrian Presidential election. This was one of the major event risks of the weekend, and the Independent (Green backed) candidate, Alexander Van der Bellen, is now president-elect. Markets had been braced for a victory for the Far Right Freedom Party's Norbert Hofer, but he conceded defeat and congratulated Van Der Bellen yesterday, much to the relief of anyone who has studied 20th Century history.
The Euro took an almost footballer-esque dive as Italy voted ' No grazie!' on reform, and then shares slipped. Italian Prime Minister Matteo Renzi has resigned in the wake of a stinging defeat on constitutional reform. GBP/EUR hit a high early this morning at 1.2040 but has fallen back to 1.1888 as I type this. We have mentioned it before and the referendum is not Italy’s, or Europe’s, biggest problem by a very long way: Italy's banks are struggling under a massive burden of nonperforming loans, several of them urgently need to raise capital. Mr. Renzi's resignation and the subsequent political instability in Italy could scare away investors and destabilize the country's already very shaky banking system, with Monte dei Paschi’s €5bn recapitalisation at stake. There has been some possible suggestion that the Italian state could nationalise the bank, even though there are many more with massive non-performing loan liabilities.
For your GBP to EUR needs and to take advantage of the extant move in your favour, please consider a SPOT trade. Placing a market order could assist you to take advantage of further upcoming EUR weakness. Please contact a member of the trading team to discuss the toolbox we can provide to see you through the festive period and for your budgeting into the next calendar year.
At home in the UK, the Prime Minister is accused of a “Brexit sell-out” by puce faced ministers who fear suggestions we could pay into the EU for a trade deal. This could be paving the way for a “grey Brexit” sell-out. The Eurosceptics suspect she is forming a clique to promote a softer deal and MPs think David Davis has forged close ties with Chancellor Philip Hammond, a soft Brexiteer. One said: “There has been a clear shift in the past week. “The issue of Brexit is no longer hard or soft, black or white. “It’s a sort of grey.” All of this with a backdrop of lobbyists threatening the departure of the big banks from the UK if Brexit is too sharp.
Attention has been largely diverted away from the US and the main events for this last week have been focused elsewhere. These include the effects of OPEC agreeing to cut oil production, which pushed USD down last Thursday. Today the week has begun with Cable at 1.2715. USD’s loss has allowed for GBP relative gain with more to come in the short term. The US Nonfarm Payroll employment figures unusually came in line with predictions last week at +178k, and remains on course for a December rate hike. The Fed has focused heavily on productivity and Americans, whilst employed, are less well remunerated and productivity is lower than anticipated. President Elect Trump’s administration will be pressured to introduce targeted fiscal stimulus directly aimed at improving productivity and getting average earnings higher.
If you have a requirement to purchase USD from GBP we would suggest considering the mitigation of some risk on a SPOT or Forward Contract basis. Please get in touch for a rate of exchange. If you are selling USD back to GBP we believe that the market will move in your favour. Please consider implementing market orders to take advantage of expected downside moves.
The week ahead: Beginning today and for the next few days the UK Supreme Court hears the UK Government’s appeal against the ruling handed down at the High Court on Thursday 3rd November that the Secretary of State does not have the power under the prerogative to give notice pursuant to Article 50 of the Treaty on European Union. Things could get nasty!
European Market Services PMI is an indicator of the economic situation in the Euro Zone services sector. It captures an overview of the condition of sales and employment. It is worth noting that the European service sector does not influence, either positively or negatively, the GDP as much as the PMI manufacturing does. The rate of Eurozone economic expansion accelerated to its highest in the year to date during November and hit 53.9 with a reading above 50 signalling expansion being bullish for EUR.
Tomorrow European GDP figures will be released, usually a rising trend has a positive effect on the EUR, while a falling trend is seen as negative.
Wednesday sees the reliable UK GDP Estimate released by the National Institute of Economic and Social Research, which will certainly influence the UK’s monetary policy.
On Thursday the ECB Interest Rate Decision is announced by the European Central Bank.
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Stay frosty out there!
Written by Damien Lipman