Economic Worries Grow; All Quiet on the Trade Front

The latest market highlights and our views on the key developments including increasing economic concerns after poor PMI reports; a quiet day of trade headlines; an update on the election; and a look at the week ahead.

Previous Day's Market Highlights

Growth Concerns

Friday's flash PMI surveys raised further concerns over the health of the global economy, with the eurozone close to stalling for a 3rd straight month, and the UK's economic output dipping back into contractionary territory.

Turning first to the eurozone, economic momentum remains incredibly fragile, with concerning signs beginning to emerge that the slowdown may be spilling-over into the services sector. November's flash PMI for the non-manufacturing sector fell to a 10-month low of 51.5, while the forward-looking portions of the report - namely new orders and future growth expectations - both disappointed, pointing to the potential for further woe ahead.

Meanwhile, the eurozone manufacturing sector continues to struggle, with November's PMI printing 46.6, the 10th straight month below the crucial 50 marker between expansion and contraction. The disappointing readings for both sectors led to the composite PMI tumbling to 50.3, a 2-month low, pointing to economic stagnation in the coming months. This fact weighed on the common currency, which ended Friday 0.45% lower, settling just above the $1.10 handle. 

Turning to the UK, the inaugural flash PMI release painted a grim picture of the UK economy. Activity in both the manufacturing and services sectors declined in November, with the latter contracting at the fastest rate since July 2016, the PMI reading just 48.6. The data paints a concerning picture for the UK economy, with the surveys consistent with a contraction of 0.2% QoQ in the fourth quarter, raising the chances of an increasingly dovish BoE.

Sterling struggled as a result of the increasing concern over the UK's economic health. Against the dollar, the pound slid 0.75%, the biggest 1-day fall in a month, falling to a 2-week low of $1.2820. The pound faced similar headwinds against the euro, ending the day 0.4% lower. 

 

Trade

On the trade front, headlines took a bit of a breather on Friday, much to the relief of many market participants after a week of to and fro.

Little in the way of concrete developments were made as the week drew to a close, though President Trump did manage to keep investors on edge by teasing an announcement "very soon" on the Hong Kong Bill in support of ongoing protests. As such, risk appetite remained subdued, aiding the dollar and Japanese yen, which added 0.3% and 0.1% respectively. Conversely, both antipodeans struck a modestly softer tone, though remained within recent ranges.

 

General Election

The general election campaign rumbles on, with all major parties now having launched their manifestos. The Conservative Party manifesto, launched on Sunday, is, unsurprisingly, heavily focused on 'getting Brexit done', with a promise to hold a vote on the Brexit Bill before Christmas, though other policies are relatively thin on the ground. The manifesto does, however, include pledges not to raise income tax, national insurance or VAT within the next five years, while also planning to maintain the pensions 'triple lock'.

On the whole, however, the manifesto - at just 59 pages - is more of a pamphlet than War and Peace-esque manifestos that parties usually release. This risk-averse stance is likely a lesson learnt from the 2017 manifesto, where Theresa May's controversial social care policies played a significant part in the failure to win a majority.

Speaking of policies, Labour Leader Jeremy Corbyn has now pledged to remain neutral in a proposed 2nd Brexit referendum, in order to 'implement whatever the people decide'. In reality, however, Corbyn has merely reinforced the fence that he was already sitting on by refusing to state which way he would vote in the potential plebiscite.

 

Any Other Business

  • Christine Lagarde's first policy speech as ECB President provided further evidence that her stance would provide continuity with Mario Draghi, while Lagarde also repeated a push for fiscal stimulus from eurozone governments
  • Data on Friday showed Canadian retail sales falling 0.1% in September, as expected. The loonie was largely unchanged by the release
  • Equity markets ended the week on the front foot, with the pan-European Stoxx 600 gaining 0.4%, and the US benchmark S&P 500 closing 0.2% higher

Finally, oil prices struggled as doubts emerged over planned OPEC-led production cuts. Global benchmark Brent shed 0.6%, while US WTI crude settled 1.4% lower

On the subject of voting intention, weekend opinion polling (see below chart) shows little change to the overall picture, with the Conservatives maintaining a double-digit lead over Labour. This will likely be concerning to Labour, with two TV appearances and their manifesto launch having failed to give any noticeable bounce in the polls. With two and a half weeks to go until polling day, time may be running out for Corbyn & Co to make up ground.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1655 1.1735 1.1550 1.58%
GBP/USD 1.2850 1.2986 1.2761 1.73%
EUR/USD 1.1025 1.1175 1.0989 1.66%
GBP/AUD 1.8910 1.9080 1.8546 2.80%
GBP/NZD 2.0010 2.0331 1.9971 1.77%
GBP/CAD 1.7080 1.7270 1.6724 3.16%

Today's Market Highlights

A fresh trading week gets off to a relatively busy start, though the data calendar comprises largely second-tier release. Of course, geopolitical developments will remain in focus, with unpredicatble US-China trade headlines likely to be the primary impetus behind any significant volatility.

 

The Day Ahead

Of particular interest today will be the latest German IFO sentiment surveys, which will provide a further read on the health of Europe's largest economy. Business optimism is expected to remain relatively subdued, with the indicator set to print 95.0 - only 0.7 index points above a 7-year low seen over the summer. Such pessimism may point to further trouble ahead for the German economy, which remains in need of fiscal stimulus, which does not appear to be forthcoming.

Meanwhile, a couple of notable releases are due from the US, with regional economic activity surveys due from both the Chicago and Dallas Federal Reserves. Any signs of softness will be closely watched, however is unlikely to have a significant impact on Fed policy, which is firmly on hold for now. Today's only other notable release comes from New Zealand, with third quarter retail sales due overnight.

Also overnight, markets will hear from Fed Chair Jerome Powell, though don't go expecting any fresh information. Powell is almost certain to reiterate recent comments that the current policy stance is 'appropriate' and that the economy is in a 'good place'; thus having little impact on the dollar.

 

Election - Week Ahead

Looking ahead, the outlook for the pound will continue to be dominated by developments in the ongoing general election campaign.

This week sees the BBC's Andrew Neil host interviews with SNP Leader Nicola Sturgeon (Mon) and Labour Leader Jeremy Corbyn (Tues), along with a 7-way TV debate on Friday, which may have some impact on voting intentions. 

Opinion polling will also remain key as the week progresses, with further indications of a Conservative majority likely to keep sterling well-supported. Further party policy announcements are, however, unlikely, now that manifestos have been released and costed.

 

Data - Week Ahead

Finally, this week's economic calendar is well-populated. A host of top-tier releases are due from the US, including November's consumer confidence survey, the 2nd estimate of third quarter GDP, and October's durable goods orders and PCE data - the latter being the Fed's preferred gauge of inflation.

Meanwhile, from the eurozone, November's flash CPI figures (Fri) are set to show the pace of price increases remaining benign, while Friday also sees the release of third quarter Canadian GDP, where the impact of any trade-war related softness will be closely watched.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.00am EUR Germany IFO Survey - Business Climate (Nov) 95.0 94.6
13.30pm USD Chicago Fed National Activity Index (Oct) -0.43 -0.45
21.45pm NZD Retail Sales (QoQ - Q3) 1.2% 0.2%
00.00am (Tues) USD Fed Chair Powell Speech