Japan re-enters recession & the world mourns France...

Week Commencing Monday 16th November 2015

Overriding Market Themes

We start this week with news that Japan’s economy contracted in the third quarter as business investment fell, confirming economist’s worst fears that the country will enter recession once again. GDP declined an annualised rate of 0.8 percent in the last three months, following a revised 0.7 percent drop in the second quarter. The common definition of a recession is two consecutive quarters of economic decline. Weakness in business investment and shrinking inventories drove the contraction, which coupled with slow growth in China and a weak global outlook has prompted Japanese companies to hold back on spending and production. This will undoubtedly put extra pressure on Prime Minister Abe, who’s “Abeanomics” has been widely hailed in the global press. Despite the shocking news, the Yen strengthened after the data release as traders used it as a safe haven currency on the back of the recent terrorist attacks in Paris. In some positive news, industrial output advanced 1.1 percent in September from the previous month, although it was not enough to make up for the dire readings in both July and August. Things are pretty bad therefore in the world’s third largest economy, and with the economy shrinking for the fifth time in seven years, it looks like there is even more trouble ahead!

Moving to the US and retail sales rose less than expected in October as US auto sales unexpectedly declined. The Commerce Department said on Friday retail sales edged up 0.1 percent last month after being unchanged in September. Sales of motor cars fell 0.5 percent last month after rising 1.4 percent in September. The decline was even more surprising given that motor vehicle manufacturers reported strong sales for October. Retail sales excluding automobiles, petrol, building materials and food rose 0.2 percent after an upwardly revised 0.1 percent gain in September. Despite the weak spending, it is unlikely that it will deter the Fed from raising interest rates next month, especially in the wake of the incredibly robust employment report in October.

Finally, French police raided the homes of suspected Islamist militants across the country overnight in the aftermath of the Paris shootings as French Prime Minister Manuel Valls warned of potential further attacks. Police sources told the Reuters news agency that authorities conducted over 100 house searches in cities around France overnight. On Friday, three coordinated teams of gunmen and suicide bombers carried out the wave of attacks across Paris in what President Francois Hollande called an "act of war" by Islamic State. Seven attackers died in the assault on the French capital, most of them after detonating suicide belts. Five were identified over the weekend, with two men named by the Paris prosecutors as Ahmad al-Mohammad and Samy Amimour.


GBP This Week

Lower than expected UK inflation could be the killer this week, especially given the market consensus of -0.1 percent. Any post worse that this will likely add further dovish tones to the Bank of England, and cause Sterling weakness (especially versus the US Dollar) as we draw further towards the end of the month. That said, given the very strong retail sales figures in October any downside GBP movement may well be muted

Sterling has in fact retraced all its post Bank of England losses last week. Despite this however, Sterling does appear to be “topping out”, especially in the context of the upcoming fiscal and monetary policy headwinds in both the EU and globally at large. Also, given the recent swing in favour of leaving the EU, expect geo-political factors to start weighing on Sterling in the medium to long term.

USD This Week

We expect the greenback to remain reasonably robust this week, especially as the FOMC step closer to monetary policy normalisation in December. With the Fed Funds rates already pricing in a circa 65 percent chance of a hike next month, we expect further upside USD movements as the market continues to price in a hike. In terms of data, inflation on Tuesday should see a healthy print in or around 2 percent annualised. Finally, manufacturing production should show a modest increase of around 0.2 percent on the month, consolidating our view that the US economy remains the most robust in the western world.

EUR This Week

Both Mario Draghi and Vice President Constancio are speaking on Monday, which along with the ECB’s October minutes on Tuesday should lead to an exciting start to the week. We believe the minutes should confirm further ECB easing will be imminent and we could also see a further cut in the deposit rate. All this should signal further weakness for the Euro, which given the current rates versus GBP and USD should present some significant buying opportunities.

In terms of data, final headline and core October inflation should come in at 0 percent and 1 percent respectively. These once again should confirm the need for further policy stimulus from the ECB.



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