Big bonfire of cash

Today's news headlines:

  • ‘Labour vows to nationalise some of BT in free broadband plan’. Jeremy Corbyn’s Labour Party has pledged to nationalise part of the BT network to provide free full-fibre broadband for all. The plan would require wholesale upgrades of Britain’s digital infrastructure, funded by an increase in taxes for tech firms such as Google, Amazon, and Facebook. Corbyn commented: ‘creating British broadband as a public service, we will lead the world in using public investment to transform our country, reduce monthly bills, boost our economy and improve people’s quality of life’. (Reuters)
  • ‘Xi ratchets up the pressure on Hong Kong to quell the violence’. In his first public comments on the crisis, Chinese President Xi Jinping reiterated his government’s demands that Hong Kong officials take more ‘forceful actions… to punish those who have committed violent crimes’. This comes after a police shooting on Monday paved the way to some of the worst violence seen since the eruption of tensions in June. The Chinese government is yet to concede ground on the five key demands of protestors, and the ongoing violence has paralysed the domestic economy, with growth prospects continuing to deteriorate. (Financial Times)

Tumbleweeds

Other than a few repeat headlines, there is very little moving the market right now. Yesterday, each of the five Federal Reserve speakers stuck to the ‘wait-and-see’ script, indicating the central bank was happy to shift into neutral. We also received the umpteenth ‘almost there’ update on US-China trade, while objective signs of progress show anything but progress. The economic data calendar is virtually empty until the latter part of next week, so that’s no help. It’s pretty flat out there right now.

Since the Sterling rally in mid-October, trading ranges for GBP/USD and GBP/EUR have been very narrow as well. This is to be expected given continued Brexit delays and persistent Dollar strength, but there is one very pernicious effect of this torpor, it breeds complacency. We humans—myopic mammals that we are—suffer from a subconscious flaw that causes us to project today’s environment into the future. In this case, subdued market price action causes us to believe it will persist, and we have time for markets to come into sharper relief before we act. This is perhaps our oldest failing, like a biological original sin, which prevents us from using the current calm productively. 

Bottom line: The Fed’s reaffirmed neutral stance bespeaks stagnation for risk assets, which have ridden the monetary policy train for some time. Unfortunately, the upcoming impeachment hearings and farcical UK election theatre are likely to be more hindrance than help, providing great soundbites but little substance. Taking UK election promises as an example, one could argue both parties are trumpeting ludicrously ineffective uses of public funds. This does not support a view for higher growth trajectory; we might as well have a big old fiscal bonfire of cash, at least it would be blessedly brief.

GBP/USD

Sterling was little changed following a poor UK Retail Sales print yesterday morning but eventually rose out of the last three days’ trading range. The Greenback pulled away from recent highs after US initial weekly jobless claims rose to an unexpected five-month high. Markets are eyeing further US data in the form of Retail Sales later today.

GBP/EUR

Yesterday, late into the European session, the British Pound rose to its highest in six months against the Euro in a move that reflected improved election sentiment, more than anything else. It’s looking increasingly likely that the Conservatives will win a majority come December 12th, supporting the narrative that a no-deal or any form of hard-Brexit is now unlikely.

EUR/USD

Yesterday, continued soft US inflation and negative employment data led to some broad Dollar weakness and prompted a marginal intra-day gain for the common currency. The near-term outlook continues to be tilted to the downside as the pair has lost around 1.5% of its value through the month-to-date.