Financial market research and analysis

The UK’s gross domestic product (GDP) may have grown at a stronger-than-expected pace of 0.5% quarter-on-quarter in the third quarter, versus 0.3% expected and 0.7% previously, according to the preliminary data release. This is the fifteenth straight quarter of growth, despite the UK’s decision to leave the European Union.

As a knee-jerk reaction, the pound rallied to 1.2272 against the US dollar, while the FTSE briefly bounced to 7005p.

The significant depreciation in the pound against the US dollar and the euro, combined with firmer oil and commodity prices, has partially tempered the immediate, negative impacts of the Brexit. Although the macroeconomic data suggest that the Brexit risks have not been realised yet, it may be too early to drive conclusions. Businesses in the UK continue operating under a heavy cloud of uncertainty.

Today’s headlines that UK banks are likely to ‘lose passporting’ shred 0.95% off the UK’s financial stocks at the London open. The Brexit related structural changes become a serious threat for the financial activity in the City.

US yields firm ahead of Fed, US election

The broad based weakness in the US dollar is leaving its place to fresh bids as US yields firm. The US 10-year yields stepped above 1.80% for the first time since June 2016, hinting that the Federal Reserve (Fed) expectations remain hawkish. Activity on the US sovereign markets price in a 72.5% probability for a Fed rate hike by December. This is the most optimistic expectation since June.

On November 1^st- 2^nd, the Federal Reserve will hold its last meeting before the US presidential election (due on November 8^th). The Fed is expected to hold fire at next week’s monetary policy meeting. First, because the event risk is high and the stability is a suitable short-term solution to avoid an additional panic in the financial markets. Second, the result of the election could impact the Fed’s outlook in the short to mid run. As mentioned earlier this week, if the new US president leans towards an expansionary fiscal policy to boost growth and economic recovery in the US, then the Fed will be in a better position to normalise its interest rate policy.

The upcoming weeks will be decisive for the US yields and the dollar’s mid-term path.

In the run up to the US elections, investors are expected to remain seated on their gold holdings, despite firmer US yields. Currently, the yellow metal trades in a $10-15 range below its 200-day moving average, $1280. If cleared, it should encourage a further recovery to $1297 (minor 23.6% retrace on Dec’15 to Jul’16 rise).

The WTI continues its journey south as speculations that OPEC production cuts would rely mostly on Saudi Arabia’s shoulders, given that many OPEC members asked to be exempt from these cuts for several understandable reasons: Iraq to fight ISIS, Iran to recover from multi-year sanctions, Libya and Nigeria due to damages their oil industries suffered from violence.

Moreover, in the US, oil inventories declined 600’000 barrels versus the 700’000 increase anticipated by analysts (vs. -5.2 million barrels last week).