With Labour Day weekend in the US, much of yesterday’s session was focussed on Europe and the ever developing situation in emerging markets. Markets traded mixed with UK stocks pressing higher on the back of a weaker pound, European markets were mixed with concerns on the Italian budget talks which start today, while in EM space indices showed signs of concerns. Austerity measures in Argentina are hoped to aid recovery, while in Turkey talk of raising interest rates to combat inflation (as a result of rapid currency depreciation) are now under way but global markets still very much focused on this.
Overnight Asian bourses were mixed, general EM concerns are weighing on sentiment and as a result we saw traditional safe haven currencies favoured with the JPY and USD firmer overnight. The USD index is up over 1% from Friday’s open and we’re back up to 1.5 week highs. The euro is a mixed bag, caught between USD strength and GBP weakness the single currency is playing second fiddle on most moves. Overnight the RBA kept rates on hold at 1.5% but its statement was less dovish than expected. AUDUSD is weaker but AUD/NZD is higher as it wins the antipodean battle.
Through much of yesterday morning we saw GBP under pressure, the first sign of GBP weakness came from the press over the weekend following comments from David Davis, Boris Johnson and the EU’s Barnier – all effectively rubbishing May’s so called “Chequers proposal”. Things are not looking great for PM May and while the pound rallied on last week’s comments from Barnier (with plenty of press headlines claiming the EU had caved) the reality of what he said was simply the EU would offer favourable “third country” rules to the UK, this still suggest moving towards a no deal scenario Brexit and his comments over the weekend once again enforcing the EU’s stance that the UK cannot just cherry pick the best bits of the single market.
That’s not the issue for May right now however because as it stands it would appear she’s going to have a hard time getting the chequers proposal past her own government and if that can’t happen there is not even a starting point for negotiations with the EU. At times it honestly feels like there has been absolutely no headway made in 2 years. UK data is showing signs of fragility, yesterday’s manufacturing PMI reading dropped to a 24 month low, a print of 52.8 vs 53.9 expected drops the UK closer to that contraction/expansion level at 50.0. Construction PMI’s headline this morning’s data releases but of greater interest will likely be BOE members sitting in front of the treasury select committee. No doubt Carney will need to answer some question about his tenure, markets somewhat nervous as the current BOE governor is due to step aside 2 months after Brexit, and while there has been plenty of criticism of Carney throughout the Brexit process, finding someone to replace him with the future of the UK so uncertain could be a very difficult task. EURGBP bounced back above .9000 yesterday but .9030/35 area once again proving a trough level to break above, that provides the first resistance with .9100 firmer above there. .8940 area offers the first major support on any breakdown in the Euro.
As mentioned, the euro is really being dictated by its counter currency. EURUSD is down over 1.3% in the last week on a stronger USD and looks set to test back towards 1.1530/1.1500 region once more. While EURGBP is up .9% in the same time frame as the pound finds itself wanting. There was a slight euro positive as rating downgrades to Italy never materialised but that still remains a concern. Needless to say the impact of a weaker pound and stronger USD has had the most telling impact on GBPUSD which has dropped over 1.7% from last week’s highs. It’s now firmly back below 1.3000 and yesterday gave up the 1.2900 handle. 1.2830 & 1.2800 provide some levels of support should sterling continue to show weakness.