Markets Await May’s Brexit Offer
The day of reckoning has arrived for the British prime minister. This evening, Theresa May will be meeting with the President of the European Commission, Jean-Claude Juncker, in Brussels, where she is expected to make a renewed offer on the financial settlement of Brexit. The Brexit bill, together with the two issues of the Irish border and citizens’ rights remain on the agenda of today’s meeting. Media reported that over the weekend negotiations between the UK and Ireland regarding the Irish border fell apart.
In the US, the Senate voted in favour of the tax reform bill on Saturday. The House and the Senate will now reconcile their two different bill versions, with analysts suggesting that Donald Trump will be able to turn it into a law by Christmas. President Trump was happy about the Senate’s vote, but his administration is now pressed by the revelation that the former national security adviser, Michael Flynn, pleaded guilty to lying to FBI agents for covering up contacts with Russian officials just before the elections. Flynn has agreed to provide cooperation to special counsel Robert Mueller.
Pound Sterling – UK Markets
Today, the Pound dropped against the US Dollar with the exchange rate set at $1.34. Sterling also inched lower against the Euro with the exchange rate set at €1.13. Friday is the most important day of the week regarding economic data as the Office for National Statistics (ONS) will publish reports associated with the UK’s trade balance, manufacturing and industrial production.
A survey by IHS Markit showed that the UK’s construction sector grew in November at the fastest pace in the last five months. Markit’s UK construction PMI rose to 53.1 beating expectations for a 51.0 figure. The report accompanying the survey said that commercial and civil engineering activity continued to decline in November, but the residential work was strong enough to support the construction sector’s rebound.
Markit’s report showed that business optimism picked up from the lowest level in October, which was also a five year low. Markit’s analysts noted that “construction firms reported that heightened economic and political uncertainty continued to hold back commercial development activity.” The drop in civil engineering was attributed to “lack of tender opportunities for infrastructure-related projects.”
US Dollar – US Markets
The US Dollar strengthened against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY), which measures the strength of the Dollar against six major currencies, moved higher at 93.13. The most important economic release this week will be the nonfarm payrolls and the unemployment rate data due on Friday.
Early on Saturday morning, the Senate voted in favour of the Republican tax reform bill. The Senate’s vote increased the possibility of the tax bill becoming a law by Christmas. The House and the Senate will now have to work on reconciling the two bills that they produced and having a final bill ready for signing in the presidential office by the end of the month. Deutsche Bank strategists noted that the tax reform is taking place against the backdrop of a strong rebound of the US economy.
Their report concludes that “the biggest beneficiary of a cut in the corporate tax rate are high tax companies.” Democrat Senators accused Republicans that the 500-page bill was constantly changed just before the voting procedure. Bernie Sanders, Trump’s rival for presidency, said that the tax reform bill is “one of the greatest robberies in US history because Republicans are looting the Treasury.”
Euro – European Markets
The Euro dipped against the US Dollar with the exchange rate set at $1.18. On Thursday, Eurostat is expected to release data regarding the Eurozone’s third quarter GDP. Analysts anticipate that the GDP grew by 0.6%, on a quarterly basis, as it also happened in the second quarter.
Eurostat published its October producer prices report for the Eurozone. Data showed that producer prices in the Euro-bloc rose by 0.4%, more than the expected 0.3% figure, on a quarter-to-quarter basis. On an annualised basis, producer prices in the single market increased by 2.5%, a bit less than anticipated. An increase of energy sector products and intermediate goods contributed to the rise of producer prices.
Francois Villeroy, the French central banker, speaking in a financial forum in Tokyo, said that “the current favourable economic winds are strong.” Villeroy noted that the European Central Bank’s (ECB) monetary policy supported the Eurozone’s recovery, adding that implementing reforms is a duty. The Governor of the Bank of France (BoF) said that Brexit is bad news, which also brings an opportunity. Villeroy, referring to the Basel III reform, stressed that unilateral banking deregulation would pave the way for the next financial crisis.
Other Currencies – Highlights
Sterling fell against the Australian Dollar, trading at 1.76 AUD. The Reserve Bank of Australia (RBA) is expected to announce its decision on interest rates tomorrow. Markets expect that the benchmark interest rate will remain unchanged at 1.5%. Analysts suggest that the RBA is justified to maintain the status quo for the 15th consecutive month as inflation remains under 2% and consumer spending continues to suffer. On Wednesday, data for the third quarter’s GDP growth will be announced.
The Pound inched lower against the New Zealand Dollar, trading at 1.96 NZD. November’s economic analysis by New Zealand’s Treasury said that flat house prices are expected to put a strain on consumption growth. Treasury’s economists noted that gradually unwinding Loan to Valuation Ratio (LVR) restrictions won’t have a major impact on house price inflation.
Sterling jumped against the Swiss Franc, trading at 1.32 CHF. Media reports said that Michel Barnier is planning on visiting Switzerland in order to gain insights into whether the Swiss-EU relationship could serve as a model for the future relationship between Britain and the EU.