Awaiting the data

Today's news headlines:

  • ‘Is Boris Johnson heading for another Brexit crisis?’ – The Prime Minister has promised to ‘Get Brexit Done’ if elected back into office, but his critics claim that he faces a tough and potentially humiliating trade negotiation with the EU. By insisting that a deal must be struck by December 2020, Johnson may have set an overly ambitious timetable to successfully negotiate with the bloc, despite chancellor Sajid Javid’s claim that ‘most of the work has already been done’. The Tory manifesto states that Johnson will not seek to extend the transition period, and if no deal is in place by December 2020, the UK would default to basic World Trade Organization rules. This would see the creation of overnight trade barriers, quotas and tariffs. (Financial Times)
  • ‘Hong Kong awaits ‘enormous’ retail hit as chaos cripples economy’ – Following six months of political unrest in the city, Financial Secretary Paul Chan, announced that the turmoil could hurt Hong Kong’s economy by 2% this year. Retail sales data for October is expected to show a significant decline meaning that the annual ‘Golden Week’ holiday in mainland China failed to translate into a tourist bump for retailers in the city. Hong Kong has been one of the largest centres for the sale of luxury brand watches but Swiss watch exports to China surpassed those to Hong Kong for the first time in October. (Bloomberg)

Ending the year on a high

One of this year’s major economic trends has been the rapid deterioration in the Eurozone’s Manufacturing Sector, but early signs of a reversal continue to develop. Markit’s Final Manufacturing PMI release, which uses a broader sample than the earlier Flash PMI release, beat expectations in France, Germany, Italy, and in the broader Eurozone reading.  Today’s reading also adds to the improvement in other forward-looking indicators such as the ZEW Economic Sentiment Index, which posted its highest reading in six-months just ten days ago.

It may be too farfetched to say that Europe is over the worst of it just yet – business climate surveys and consumer confidence are yet to significantly improve, but an uptick in broader global sentiment seems to be occurring as we enter year-end. We know from looking back on this year that positive rhetoric regarding the US-China trade dispute should be taken with a pinch of salt and the risk that any potential deal falls apart remains uncomfortably high. Looser monetary conditions are likely to have helped lift the data recently, but a change in the fundamental drivers of economic growth must occur if the improvement is to continue in 2020.

Bottom Line: Improving economic data could prompt investors to be bullish on Euro-area assets in 2020, especially if the US-China trade dispute clears up. However, it’s more likely that an improvement in fundamental data will be required for markets to shift their weight on European assets and for the European Central Bank (ECB) to think about changing their projected interest rate path. A bottoming-out in forward looking data is just the first few drops in an ocean needed for the ECB to change their outlook on Europe. Their biggest sticking point is stubbornly low inflation, which has prompted discussions on revising the inflation goal entirely.

llllllllll.jpg

Source: Bloomberg

GBP/USD

Looking back on the previous week, the Pound rose nearly 1% against the Greenback following the release of polling data that predicted the Tories would win a majority in the upcoming general election. The Pound has held on to those gains into this week and remains above the 1.29 interbank level. We’re watching the UK’s Manufacturing PMI release this morning for movement in the pair before the US ISM Manufacturing PMI is released this afternoon.

GBP/EUR

Political developments meant that Sterling hit close to seven-month highs against the common currency last week and the Pound has carried much of that move higher into this morning’s session. A meaningful break towards the 1.18 handle could still be some way off and would possibly require the guarantee of a Tory majority win in next week’s election to see a breach above that level.

EUR/USD

Despite dipping down into the 1.0980’s on Friday, the pair is back above the 1.10 level this morning, awaiting the raft of Eurozone PMI data. Worrying political developments out of Germany, where Merkel’s coalition could be in jeopardy, may continue to weigh on the common currency this coming week. As usual, all eyes are on the US and China for signs of progress on the much-fabled phase one trade deal.