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The US midterm elections have been and gone and after the dust settled, the underlying market concerns remain the same. Wall Street ended the previous week lower amid ongoing concerns over global growth, aggravated by softer economic data from China. Whilst a more hawkish Fed fuelled fears of a steeper path of interest rate hikes, dampening expectations for corporate growth.
Whilst Asia put in a mixed performance at the start of the week, European bourses were looking decidedly more positive. The FTSE is seen leading the charge in Europe, drawing support from a Brexit-weakened pound and rallying oil price. Saudi’s promise to cut oil production by 0.5% to curb supply after US sanctions on Iran were less severe than expected, boosting oil. Brent rallied over 1.5%, overnight, regaining Friday's losses and pushing back through $71.00
Pound Struggles as Pressure Mounts on May
Brexit and politics will be critical once again to the pound this week. Despite Brexit deal speculation last week, the lack of any solid developments and the conflicting nature of Brexit rumours started to weigh on sterling by Friday, pulling it off highs reached earlier in the week.
A weekend full of Brexit headlines dragged on sentiment for the pound overnight. The pound fell over 0.5%, tumbling to an 11-day low. Sterling will remain under pressure particularly as November 21st moves into sight; the date which the Brexit Secretary touted not so long ago as a possible agreement date, which is now looking extremely unlikely. The UK Transport minister’s resignation on Friday is unlikely to the be the last from the cabinet as pressure mounts on Theresa May. We expect the pound to be in for a rough ride, especially if Theresa May attempts to force her Brexit plan through, for there is growing opposition within her own government. There is a good chance that she may not come out the other side. The chances of a Brexit deal are diminishing rather than increasing as we approach the finishing line. There is no high impacting UK data to be released today, domestic political risk combined with Brexit fears will weigh heavily on the pound.
Going forward there are some data points which could steal trader’s attention, such as the UK jobs figures, inflation data and retail sales later in the week. However, concrete progress in Brexit negotiations will be needed, otherwise, the pound could quickly target $1.28.
Italian Budget Due for Resubmission Tuesday
Attention is set to return to Italy in a big way this week, as the deadline for Italy’s resubmission of its Budget falls on Tuesday. Rome is expected to defiantly stand by the main pillars of its previous Budget, which Brussels rejected for flouting the spending rules of the European Commission. This comes to a backdrop of weak economic data from Italy. The service sector PMI shows activity has moved into contraction, whilst the GDP is now forecast at 1.2%, down from 1.5%.
Italian borrowing costs remain elevated at 3.4% and could push back towards 3.7%, should fears of a sovereign debt crisis escalate. The euro is off 0.1% in trading overnight, extending losses from the previous week.