Today's news headlines:
‘Far-right makes big gains as Socialists top inconclusive Spanish poll’.Spain’s fourth election in as many years has failed to break the country’s political impasse with the ruling Socialist party taking a reduced share of the vote. The Socialists' tally of 120 seats falls significantly short of a potential majority in the Chamber of Deputies and jeopardises Pedro Sanchez’s ability to form a government. Sanchez commented on the result, calling for other parties to show responsibility to break the current deadlock. (Financial Times)
‘UK election stops BOE from giving markets clues on rate policy’.Countrywide political turmoil has restricted policymakers at Britain’s central bank from sending signals about the path of future interest rates. Officials have now entered a period of quiet in the run-up to the Dec 12th general election to avoid any indication of political bias. The Monetary Policy Committee is therefore unlikely to alter interest rate policy just before Christmas. Sanjay Raja, a UK economist at Deutsche Bank, commented: 'A lack of communication before the December meeting will make communicating a shift in policy difficult', leaving scope for a January cut. (Bloomberg)
The UK’s main political parties will face new headwinds as they base their December election campaigns around an increase in fiscal spending due to Britain’s sovereign credit risk. Over the weekend, credit rating agency Moody’s downgraded its outlook on the UK’s Aa2 sovereign credit rating from ‘stable’ to ‘negative’. In its statement, Moody’s blamed a weakening ability for the UK to set appropriate economic policy in the Brexit era along with its concern over a rise in the UK’s debt level while growth remains muted. While it’s only the UK’s credit outlook that has deteriorated, Moody’s decision signals that a downgrade in the credit rating itself could be imminent.
Moody's assessment comes at a crucial time for the UK as the major political parties begin their countrywide campaigns leading up to the December 12th general election. Both Labour and the Conservatives are campaigning for a significant fiscal boost, and a deterioration in the UK’s sovereign credit rating risks increasing the government’s cost of borrowing through a rise in gilt yields. The UK already has a debt-to-GDP ratio of 82% (in line with the European Union average), and its plans for increased spending combined with rising credit risk could cause a problem for the future government if the fiscal boost proves to be ineffective.
Bottom line: While many economists would agree that the UK’s plans for a fiscal boost are a good idea while interest rates are near the zero lower bound, rising sovereign credit risk may be counter-productive for the government. Greater credit risk will likely result in more pressure to ensure increased government borrowing is effective, and failure to deliver effective policy may necessitate intervention by the Bank of England; a situation that all involved would rather avoid.
A cautious sense of optimism over the future of the US-China trade war sent the Dollar to multi-week highs this morning following a sustained move higher on Friday. The Pound is currently hovering around the 1.28 handle against the Greenback, and we expect volumes and liquidity to be limited today while the US observes Veterans day.
The Pound recovered from its post-BoE losses to begin Friday climbing as high as 1.1630 against the common currency. It's settled closer to the 1.16 handle this morning as markets await a slew of UK and EU economic data this week, beginning with UK GDP and Manufacturing Production this morning. On the UK political front, support for the Conservatives looks to be mounting and could lead to Sterling edging higher in the short-term.
Dollar strength has been the driver of this pair in recent days with the currency cross trading in the low 1.10 region as of this morning. We expect a relatively quiet day for both the Euro and Greenback due to the US public holiday and a lack of top tier economic data due out from the Eurozone.