Market risk ahead of Renzi referendum on Sunday...
Week Commencing Monday 28th November 2016
UK: GDP estimate holds despite Brexit fears!
The Office for National Statistics has said UK gross domestic product grew by 0.5 percent from July to September, confirming the initial estimate in October.
This means year on year, growth should be confirmed in at 2.3 percent which is roughly in line with economist’s expectation and a solid number.
Diving into the figures, only the services sector recorded a quarter-on-quarter increase, while agriculture, forestry and fishing, construction, and production all showed declines during the period. Production output decreased by 0.5 percent in the third quarter, compared with the previous three months, revised down 0.1 percentage point from a previously published estimate. Despite a 1 percent drop in Q2, exports were up 0.7 percent in the third quarter, while imports fell 1.5 percent despite a 1.3 percent jump in Q2. Separately, retail sales have picked up with volumes growing at the fastest pace for over a year in the 12 months to November, according to the CBI’s quarterly Distributive Trades Survey.
CUBA: Castro's death throws country into mourning.
Cubans will begin massing on Havana's Revolution Square from Monday for a week-long commemoration of Fidel Castro, the communist guerrilla leader who led a revolution in 1959 and ruled the Caribbean island for half a century.
His death comes amid improving relations between the Communist state and the US, after nearly 60 years of isolation. There are hopes that a softening of the US led sanctions will lead to a huge influx of inward investment into the country, however it remains unclear whether Castro’s death will have a positive or negative effect on this dream.
A truly controversial figure, Castro is a love or hate character! I wonder how much trouble Boris Johnson can cause at the funeral!
ITALY: Renzi in a spot of bother as polls continue to turn.
Investors reeling from democratic shocks in Britain and the US are worried about Italy’s future in the Euro, with the impending referendum scheduled for the 4th December.
A defeat for Renzi, who proposed the vote and initially pledged to resign if the result did not go his way, could lead to early elections and a rise in support for the populist Five Star Movement. If they were to seize power in a post-referendum election, the potential market reaction would be severe.
The fears are already being reflected in current European assets, with the euro’s more than 3 percent slide this month to the lowest level since March 2015. This risk is also signaled by Italy’s 10-year bond yield climbing above 2 percent for the first time in more than a year.
EUR/USD's decline continued last week and reached as low as 1.0518. Initial bias stays on the downside this week. This is compounded by a relatively bullish Dollar and a lack of decent Eurozone economic data releases this week. A decisive break of 1.0461 should signal a further decline to parity.
GBP/USD remains within its current trading range last week, with the pair touching 1.25 on Friday. We are neutral on the pair this week, especially in the context of renewed Brexit pressures and more “stable” Trump rhetoric. We expect the pair to trade between 1.2673 to the upside and bounce off resistance at 1.2301.
GBP/EUR continues to see upside movement, with the pair trading above 1.17 for part of last week. Italian referendum fears coupled with French political risk appear to be outweighing Brexit concerns at the moment, and as such we remains bullish on this pair. We expect to see the pair continue to track a positive bias throughout the week, however hitting heavy resistance at the 1.1825 level.
Economic Calander for the Week
We have the start of the PMI releases at the end of the week for the UK, with Manufacturing kicking off. We expect a slight increase in the index, pushing up from last months 54.3 to a new post-Brexit high of 54.5. We then shift our focus to Construction PMI, which should see a small decline on the month from 52.6 to 52.2.
We have a busy week for the US, with US GDP and Nonfarm Payrolls headlining. We expect GDP to edge up by 0.1 percent to 3.0 percent annualised on Tuesday, Moving to Wednesday, we expect ADP Nonfarm Employment Change to edge up to 165k for November, while pending home sales is likely to disappoint at 0.4 percent.
Thursday’s ISM Manufacturing PMI should see marginal gains on the month to 52.2, while Friday’s NonFarms and Unemployment Rate should remain relatively stable at 175k and 4.9 percent respectively.
We have a quiet week for the Eurozone, with CPI the only release of note on Wednesday. We expect CPI to edge up to 0.6 percent on the month, mirroring the large gains seen in the UK numbers. On both Monday and Wednesday we have ECB President Mario Draghi speaking, with markets paying particular attention to Brexit, Trump and European geo-politics.