Image © Pound Sterling Live
It was a soft start for Asian markets, but looking at spread betting market pricing, European stocks are likely to start in the green. It's therefore actually quite hard to read the markets: we have Europe likely to start in the green, but Asia is in the red suggesting something of a dislocation.
Under such contradictory circumstances the currency reaction will likely be hard to read.
U.S. equity futures and Asian shares slid "on worries over slowing growth and fears that a rise in tensions between Washington and Beijing could torpedo chances of a trade deal," report Reuters.
However, we question this narrative as we would expect European shares to follow suit in such a market. Perhaps more instructive is the strong performance of the Australian and New Zealand Dollars at the start of the new week.
These currencies would tend to fall in trade-war inspired negativity.
Furthermore, the U.S. Dollar and Yen are at the bottom of the performance board, suggest demand for safe-havens is lacking.
This is therefore a tricky market to read on Monday morning.
Geopolitical concerns are a potentially important factor to be wary of going forward and might explain why Asian shares are underperforming.
The U.S. ambassador to China has been summoned by Beijing in protest at the arrest of Huawei's CFO, "and that's driving sentiment across Asia," says Kit Juckes, strategist with Société Générale.
"Hopes of fruitful trade negotiations have taken a beating since the optimism that was around a week ago when the Buenos Aires G20 meeting prompted hope of a rally into the end of the year for equities. If nothing else, that's a reminder not to simply extrapolate Monday morning moves and expect them to continue all week. Mondays often continue Friday trends, telling us little about what happens next," adds the analyst.
Brexit forms the highlight of the week with the meaningful vote on the EU-UK Brexit deal due on Tuesday at 19:00 GMT. The vote is almost certain to fail, and therefore what matters is the scale of the loss: a small loss suggests the deal could pass if some tweeks are provided.
However, a larger loss suggests the deal is truly dead. Theresa May could push to open negotiations once more, she could be voted out by her own party, or parliament. Parliament could prompt a softer Brexit, or the country could default into a 'no deal' Brexit.
Uncertainty is the name of the game, and no one really knows how this will all play out.
There is a slew of UK data to watch at the start of the new week with the release of both quarterly and monthly GDP due out at 09:30 AM.
Markets are looking for the monthly figure to show just 0.1% growth while the quarterly figure is expected to show growth at 1.6% in the third quarter.
The monthly figure is the more timely and likely to give the best insight into current trends in the economy and is therefore likely to have the most market impact.
There is another monthly figure to watch - the rolling three month change, i.e. how the past three months compared with the previous three months (as opposed to simply the past month, or the previous quarter).
Here a 0.4% reading is expected.
Manufacturing production data are out at the same time, markets are looking for the sector to show 0% growth month-on-month in October, the annualised figure is forecast to read at 0.4%.
Trade data are out too. We have noted trade data to have been supportive of late, with the trade deficit coming down in the September data which was released last month.
The trade balance is forecast to have expended to -10.50BN in October.
Any impact to Sterling from the above data are likely to be limited, traders are focussed on the big Brexit vote in parliament this week and therefore any reaction by Sterling to the data will likely be faded and short-lived in nature.
The Euro is outperforming at the start of the week, recording a 0.33% jump against the U.S. Dollar and a rise against most G10 currencies.
The move has no Euro-specific grounding.
Euro exchange rates will this week take direction from the European Central Bank (ECB) whose December policy meeting at 12.45 GMT, on Thursday, December 13, will be closely watched.
The ECB is expected to plough on with its roadmap to reducing monetary stimulus and announce an end to quantitative easing (QE) at the meeting. This is still expected by most analysts despite the growth rate falling to the lower band of 2018 forecasts and only hitting 0.2% in Q3.
“Although Mario Draghi could strike a more cautious tone at his post-meeting press conference on Thursday, he is unlikely to signal any change of path in the ECB’s policy normalisation plans just yet,” says a note from brokers XM.com.
This should keep the Euro supported, but any sign the ECB is getting cold feet on its intended policy plans could really shake the markets and trigger a deeper slide in the value of the single-currency.
Concerning the technicals underpinning the headline EUR/USD exchange rate:
"EUR/USD has recovered to reach the 55 day moving average at 1.1436. We look for further gains to the November high at 1.1500 and1.1530/1.1622 (2018 downtrend and 16th October high). This will need to be overcome to negate downside pressure Dips lower will ideally be contained by 1.1300," says Karen Jones, a technical analyst with Commerzbank.
As mentioned, the Dollar is down against most major currencies, despite the soft start for Asian stock markets .
"Markets are becoming more concerned about U.S. economic growth over the next few years. The Funds rate futures market has removed pricing for about 1½ rate hikes since November," says Elias Haddad, a foreign exchange strategist with Commonwealth Bank of Australia.
Haddad notes a cocktail of indicators suggesting a slowdown in economic growth as to why the Federal Reserve should perhaps slowdown on the pace of interest rate rises: U.S. bond yields decreased by 5‑7bps along the curve up to 10 years. The S&P 500 equity index fell again and has fallen by 10% since early October. VIX volatility has doubled.
Friday's employment and wage data only supported the narrartive.
Wage pressures were softer than seen over recent months, back down to a ‘low 3.1%', but Société Générale's Juckes points out that 0.04% monthly slowdown coms after a 0.3% monthly acceleration the previous month.
"Likewise, although the rate of growth of non-farm payrolls slowed to 1.66% y/y, that comes after a 12-month acceleration and anyway, add a bit of productivity to that pace of job creation and there's nothing to fuss about," says Juckes.
"However, although the jury's still out on the economy, and on whether the Fed needs to rethink, the data weren't strong enough to offer support for retreating bond bears and worried equity bulls," notes the strategist.
The Australian Dollar is outperforming rivals and reversing some of the sharp losses suffered at the close of the previous week.
Reserve Bank of Australia Assistant Governor Christopher Kent spoke at a Bloomberg event on Monday, indicating the next move on interest rates will likely be a rate rise, but the pace of any rate rises will be gradual.
The call comes as markets are increasingly wary of RBA policy in light of a potential slowdown in the Australian property sector.
We note in our week-ahead forecast that this is a busy week for housing market data and economists are anticipating a slew of negative readings to be delivered this week.
However, Monday's release of home loans showed a 2.2% increase month-on-month in October, where markets had forecast a 0.5% contraction. This will go a long way in easing fears that the sector might just be witnessing a blip.
"The solid lift in Australian housing credit reduces some of the downside risk to dwelling prices and offers AUD support," says CBA's Haddad.
Hence, Kent could be right in suggesting the next move in interest rates will be higher.
This is AUD positive.
Be aware that Tuesday brings with it the quarterly House Price Index reading, markets are looking for prices to fall 1.5% in the third quarter.
The Bank of Canada's Timothy Lane speaks at 12:45 GMT; markets will be looking for any further information as to why the Bank of Canada turned 'dovish' last week; at their December policy meeting they hinted they would likely ease the throttle on the pace at which they plan to raise interest rates.
The outcome proved negative for the Canadian Dollar. We are not sure on what Lane's speech will touch on, but any reference to interest rates and monetary policy could move the market.
"Poloz and BoC followed in the footsteps of Powell and Fed last week, by hinting a much more gradual approach to rate hikes," says Martin Elund with Nordea Markets who says he sees value in selling the Canadian Dollar "if we add renewed housing market risks to the mix for Poloz and BoC."
The Canadian housing market is showing early signs of rolling over thanks to four months of weakening house price momentum.
There is housing data due out of Canada today, housing starts for November are due for release at 13:15 GMT with markets expecting a reading of 198K.
Building permits issued for October are expected to have read at -0.2% month-on-month.
Watch retail sector data out of New Zealand at 21:45 GMT where we receive quarterly electronic card retail sales numbers.
No analyst forecast is provided by the likes of Reuters or Bloomberg, but what we do know is that spending in the retail industries rose 0.1% in October.
The soft October read could be expected as it comes off a hot third quarter: quarterly retail card spending in the September 2018 quarter rose at its fastest pace in seven and a half years, Stats NZ said back in October.
So the giveback in October is expected, but if the trend is to a pickup in retail activity into year-end we would like to see the November data reflect this.
The data is typically not a substantial driver of the NZD, but it will inform the debate as to when the Reserve Bank of New Zealand should raise interest rates, a question that will in turn inform longer-term NZD valuations.
Bank-beating GBP exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here