Financial market research and analysis

The pound is in on a good vibe this week, as investors gradually return on hopes that a higher divorce bill could melt the ice between EU/UK officials on Brexit negotiations. The UK budget statement will be in focus today. Chancellor Philip Hammond will likely sound cautious on budget and his statement could have a limited impact on the pound. Cable is consolidating gains above the 50-day moving average (1.3215). Offers are touted at 1.3280/1.3300. The EURGBP tested 0.8840 (major 61.8% retrace on November rebound) on the downside, if cleared, could encourage a further slide toward the 200-day moving average (0.8815).

The FTSE 100 was little changed at the open. Energy stocks (+0.29%) outperformed on firming oil prices.

WTI crude (+1.90%) gained momentum and reached $58/barrel, after the API data showed 6.36-million-barrel contraction in US crude inventories last week. The more official EIA data is due today, the consensus is a 1.4-million-barrel contraction versus 1.9-million-barrel rise printed a week earlier. Given that OPEC’s production extension plans have already been widely priced in, other factors are perhaps behind the price oscillations at the moment. Offers are seen at $58/60 area, as some traders wonder what would happen if the Mid-East tensions were to ease. Have the OPEC production cuts been more effective due to supply disruptions in Middle East and could the easing tensions impact the price evolution negatively?


UK budget statement

The budget statement will be the major highlight in the UK. This is the first official statement in autumn, and not in spring, for 20 years. Released once every year, the document reveals an updated economic outlook and the government’s budget for the coming year, a prediction of spending and income. The Brexit situation doesn’t make the task easy for the policymakers. Chancellor Phillip Hammond is expected to set a positive tone for Britain after Brexit. The question is, would Chancellor Hammond announce higher spending? Here are some reasons why he would increase spending:

1. UK unemployment is low, which means more tax receipts,
2. Last year’s borrowing was lower,
3. And, Gilt markets would perhaps welcome more spending.

But he probably won’t because

4. OBR is forecasting a weaker productivity,
5. Higher interest rates mean higher debt servicing costs,
6. It could be safe to keep cash in reserve for a slowing economy caused by Brexit uncertainties.

Hammond has already shared his intention to stick to his fiscal policy and have a control on the budget given the difficult EU divorce. His cautious stance is criticized by hard Brexiteers, who are in favour of lower taxes and higher spending in order to give a support to the citizens as Brexit risks prevail. One of the Leave campaign promises was indeed tax cuts and 350-million-pound worth spending on NHS per week. Mr Hammond, on the other hand, believes that the country ‘must live within its means at a time of economic uncertainty’. Without a clear Brexit deal in horizon, Mr Hammond will unlikely provide fiscal gifts on Wednesday’s budget statement. As a result, the pound traders should not be overly concerned about a potential negative impact on the currency. Of course, the difficult Brexit negotiations, rising tensions at the heart of the government and the declining support for PM Theresa May will likely keep the bears active in the market. The pound markets will be subject to the risks of sudden and sharp sell-offs as long as the political uncertainties persist.


US stocks rally to record highs, traders watch Fed minutes

The US stocks rallied to new all-time highs on Tuesday after taking over a bullish market from Europe. The S&P500 hit 2’600 level for the first time, as the Dow Jones reached 23’617.80, but fell below 23’600 before the close. There is no progress on the US tax reform bill and there will probably not be any surprise before Thanksgiving (Nov 23). Looking at the cross-assets prices, it appears that the market is leaning toward a positive outcome on the tax deck. The US yield curve is flattening for this same reason. Pension funds are suspected to increase their US sovereign holdings in preparation for a significant tax overhaul. The US 30-year yield fell to 2.75%, as the 10-year yield is stagnating near 2.35%, above the critical 2.30% level, which corresponds to the 200-day moving average.

The flattening yield curve weighs on the USD sentiment. The Federal Reserve will release its latest meeting minutes. The Fed stood pat at its latest meeting. The FOMC minutes could hardly surprise the market on the upside, given that the probability of a December rate hike stands above 90%. Inflation concerns could once again be brought on the table, yet the impact on the actual pricing will likely be limited after the core inflation advanced to 1.8% in October after having stagnating at 1.7% over the five months before. The US 10-year yields should continue seeing support by the 2.30% level. The USD-longs would feel uncomfortable in case of a slide below this level.


Yen strengthens

The USDJPY fell short of a sustained positive momentum and the topside could remain capped by the daily Ichimoku cloud top (112.75). The key support stands at 111.91 (major 38.2% retrace on September – November rise). A slide below this level should pave the way toward the 200-day moving average (111.47).


Euro swings between two opposite forces

German political tensions somehow curbed the positive momentum that the euro needs to attract long positions to a low yielding currency. Two opposite forces are in play for determining the euro appetite right now. The Eurozone yields edge lower and low yields are discouraging for taking and sitting on long positions. Yet on the other hand, lower core-periphery spread provides some support. The EURUSD could continue seeing resistance pre-1.1800 (100-day moving average). Support is eyed at 1.1707/1.1670 (50% and 61.8% retrace on November rebound).


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