Attention Turns to UK Cabinet Meeting and US Midterm Elections
What’s been happening?
Pound Sterling – UK Markets
The British Pound started the week on a strong footing on the back of The Sunday Times’ report, which claimed that the EU made a significant concession to let the UK stay in the customs union temporarily, and recorded gains vs both the dollar and the euro. Although the European Commission’s spokesman said that they were “not there yet” on Brexit talks, the pound sterling preserved its strength ahead of Tuesday’s Cabinet meeting. Meanwhile, Irish Prime Minister Leo Varadkar stated that it would be ideal to get a Brexit deal by the end of the year and added that European leaders at the Eurogroup meeting agreed to avoid a hard-border and they were hopeful that negotiations could conclude in a satisfactory manner as soon as possible.
On a negative note, the final reading of the IHS Markit’s Services PMI report in the UK revealed that the non-manufacturing sector in October expanded at its weakest rate since March. “Many of the respondents attributed this poor performance and the biggest softening in new order growth since July 2016 to continuing ambiguity around the Brexit negotiations. There were also concerns over the weakness in the UK and global economies which affected client confidence and consumer spending,” Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said.
US Dollar – US Markets
Ahead of Tuesday’s highly-anticipated midterm elections in the United States, the dollar failed to capitalise on last Friday’s strong labour market data and weakened against its rivals. Despite Monday’s upbeat PMI data, the US Dollar Index, which tracks the greenback against a basket of six major currencies, closed the day with modest losses as a sharp fall witnessed in the U.S. Treasury bond yields didn’t allow the currency to find demand.
The data released by the IHS Markit showed that the business activity in the service sector grew at a healthy pace with the PMI improving to 54.8 in October’s final reading from 53.5 in September. “A rebound from a weather-torn September and strong demand propelled service sector growth in October. Combined with the steady output growth being recorded in the manufacturing sector, the survey data suggest the economy grew at its fastest rate since July,” Chris Williamson, Chief Business Economist at IHS Markit, said. Additionally, the ISM’s Non-Manufacturing PMI came in at 60.3 in October to beat the analysts’ estimate of 59.3. “The non-manufacturing sector has again reflected strong growth despite a slight cooling off after a record month in September. There are continued concerns about capacity, logistics and tariffs. The respondents are positive about current business conditions and the economy,” the ISM noted in its publication.
Euro – European Markets
The data released by the Sentix showed that the investor sentiment in the eurozone deteriorated for the third straight month in October and the Investor Confidence Index touched its lowest level in two years. "The problem areas in Europe and the global economy remain largely the same, which does not make it any better. Germany's weakness is also weighing on the Euroland economy," the publication read.
Meanwhile, according to the Politico, the European Commission is planning to propose disciplinary action against Italy under the EU’s fiscal rules on November 21 unless the Italian government agreed to change its budget draft. Moreover, in a published statement following the Eurogroup meeting on Monday, “We look forward for Italy and the Commission to engage in an open and constructive dialogue and for Italy to cooperate closely with the Commission in the preparation of a revised budgetary plan which is in line with the Stability and Growth Pact," the eurozone finance ministers said. Although Italian economy minister Tria reiterated that they wouldn’t change their budget proposal, the market reaction was relatively limited and the shared currency recorded small gains against the dollar while weakening modestly vs the British pound.
What’s coming up?
UK: In the absence of macroeconomic data releases from the UK on Tuesday, investors will stay focused on the Cabinet meeting.
US: JOLTS Job Openings and IBD/TIPP Economic Optimism Index will be published. More importantly, voters across America on Tuesday will go to polls to decide who will control the House and the Senate.
EU: The European economic docket will feature the IHS Markit’s Services PMI data for Germany and the euro area. Furthermore, the Eurostat will publish September PPI, which is expected to stay unchanged at 4.2% on a yearly basis in September.