Trade Optimism Returns

Risk appetite improves as hopes of a US-China deal grow; sterling supported by expectations of a Tory majority; central bank minutes eyed this week.

Previous Day's Market Highlights

Trade talks are “coming down to the short strokes” according to White House Economic Advisor Larry Kudlow.
 
Yes, we’ve heard it all before, but markets liked it nonetheless.
 
As a result of Kudlow’s comments - which shouldn’t be surprising given the Trump administration’s fixation on teasing markets that a deal is imminent - sentiment was buoyed heading into the weekend, with market participants once again hopeful that a ‘phase one’ Sino-US trade deal may be close, or at least taking solace in the fact that the two sides are still talking. Kudlow added that recent talks had been ‘constructive’ and that the ‘mood music is pretty good’ further aiding risk sentiment.
 
Kudlow’s comments were made early in Asian trading, however risk appetite remained healthy throughout the trading day. As a result, both antipodeans gained ground, seeing the Aussie dollar close 0.4% higher, and the Kiwi dollar add 0.25%. Conversely, the safe-haven Japanese yen lost ground, dipping 0.3%, while the Swiss franc closed unchanged. Bond yields, which move inversely to price, also continued to rally, with US 10-year Treasuries adding 3bps.
 
Elsewhere, Friday’s data slate did little to help the dollar, which ended the day 0.25% lower against a basket of peers. The dollar’s decline came partly as a result of the improved risk environment, partly due to a mixed bag of retail sales data, and partly due to dismal industrial production figures.
 
October’s retail sales figures came in slightly better than expected, showing sales increasing at 0.3% MoM, a relatively strong rebound from September’s unexpected decline. However, the more important control group measure - which covers the basket of goods included in GDP data - shows the trend in sales continuing to slow, also increasing at 0.3% MoM. While this should ensure a relatively solid pace of expansion, risks are skewed to the downside, particularly if global risks persist.
 
Speaking of risks, the ongoing global slowdown, as well as US-China trade tensions contributed to a disappointing set of industrial production figures. Production across the US dipped by 0.8% last month, double the 0.4% expected, and indicative of further weakness to come in the industry.
 
Also on Friday’s data slate were October’s final eurozone CPI figures, showing the pace of price increases remaining incredibly benign. Headline CPI increased by just 0.7% YoY last month, a near 3-year low, while core CPI held steady at 1.1% YoY. Both figures were unrevised from the previously released flash estimate. However, the sluggish, near non-existent, pace of inflation provides further evidence of the challenges facing new ECB President Lagarde and policymakers’ limited toolkit. The common currency, however, added 0.25% on Friday, supported by continued rumours that the US would be dropping planned tariffs on EU auto imports.
 
Meanwhile, in the UK, election campaigning continues to be the primary factor driving sterling. The pound found some demand late-Friday after it emerged that the Brexit Party were not standing in 38 non-Conservative seats, perhaps increasing the chances of a Tory majority come December. Further boosting this sentiment will be the usual round of weekend opinion polling, with most polls pointing to a Conservative lead of between 10 and 17 points. On Friday, sterling closed 0.15% higher against the dollar, briefly trading above $1.29 for the first time in over a week; while the pound ended the day unchanged against the euro.
 
Away from FX, the positive trade sentiment boosted equity markets. In Europe, the pan-continental Stoxx 600 closed 0.4% higher, while the US benchmark S&P 500 added 0.75%, closing at a fresh all-time high. The S&P has now chalked up 6 straight weekly gains, the index’s longest streak since 2017. Finally, oil prices were also supported by upbeat trade sentiment, with global benchmark Brent and US WTI crude both settling 1.7% higher on Friday.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1685 1.1703 1.1525 1.52%
GBP/USD 1.2925 1.3012 1.2761 1.93%
EUR/USD 1.1060 1.1179 1.0989 1.70%
GBP/AUD 1.8965 1.9022 1.8546 2.50%
GBP/NZD 2.0185 2.0331 2.0002 1.62%
GBP/CAD 1.7075 1.7095 1.6724 2.17%

Today's Market Highlights

A fresh trading week begins with a barren economic calendar, with today seeing no notable economic releases. As a result, the ongoing issues of Sino-US relations and the UK general election campaign will remain the dominant factors driving price action.
 
Perhaps injecting some variation into this mix will be remarks from a handful of central bank speakers, including the FOMC’s Mester, ECB Vice President de Guindos, ECB Chief Economist Lane and RBA Assistant Governor Kent. Investors will pay close attention to any comments on the policy outlook, as well as the ECB’s continued push for fiscal stimulus from eurozone governments.
 
Looking ahead to the remainder of the week, monetary policy will remain in focus, with minutes from the latest FOMC, ECB and RBA meetings all due. Market participants will be paying close attention to policymakers’ views on the economic outlook, as well as being on the lookout for any hints on future monetary policy shifts. The FOMC are likely to reiterate that monetary policy is firmly on hold, barring a ‘material reassessment’ of the outlook; the ECB will likely push for increased action from eurozone governments; and the RBA are likely to repeat their easing bias.
 
Elsewhere, December’s general election will continue to dominate the landscape for sterling, with the week ahead seeing two major TV events, and the release of the Labour Party manifesto. On Tuesday, PM Boris Johnson will go head-to-head with Labour leader Jeremy Corbyn in the first TV clash of the campaign, before the two leaders - as well as SNP Leader Nicola Sturgeon, and Lib Dem Leader Jo Swinson - appear on the BBC on Friday. Reaction to the debates, and their impact on opinion polling, will be a key impetus for sterling.
 
Finally, this week’s data calendar is relatively light, with the majority of major releases coming on Friday. Of particular interest will be November’s flash PMI figures from the eurozone, expected to show a continued contraction in the manufacturing sector along with a steady pace of expansion in the services sector. For the first time, flash PMI figures will also be released from the UK, also on Friday, around a week ahead of the complete data. Other highlights this week include Canadian CPI and retail sales figures, along with Japanese CPI and final US consumer sentiment data.

Today's Economic Calendar

Time Currency Release Consensus Previous
00.30am (Tues) AUD RBA Meeting Minutes (Nov)