On the doorstep of change

November represents an opportunity for change on many fronts. The US Presidential Election is one way things could shift in the political arena, especially if Joe Biden’s 10% national poll lead wins the race for him. Brexit is another four-year issue that might be laid to rest in the next several weeks, which most political strategists believe is the deadline for a trade deal with the EU. 

Whatever else one might say about him, Donald Trump is a fighter. While the poll numbers favour Biden’s bid for ‘Build Back Better’ and his strategy to renew political ties in Europe and reaffirm cast-away alliances like the Paris climate accord, the Trump administration is not out of the fight yet. In fact, the probable ascension of Amy Coney Barrett to the Supreme Court could secure another route to re-election: hire your own judge. If the mail-in voting process combines with a close race result in a Trump loss, expect him to fight the decision legally. While tradition and some case law suggests Barrett may have to recuse herself in that eventuality, the Republican’s have ironically demonstrated that this sort of conservative thinking is outdated, by going against their own guidance from 2016 and pressing for her appointment in the first place. Either way, prepare for a messy battle to arrive at a place that distinctly resembles the fractious present.

Speaking of messy endings, Brexit – like the economic end-of-days – is nearly upon us. The tough talk continues to and from the Johnson administration, although most political pundits believe this is a façade and will be dropped before the deadline. That said, the PM is launching a major advertising campaign to hurriedly warn businesses to complete no-deal preparations. Which seems necessary, as according to the Institute of Directors only half of UK businesses have done so. The other rather staggering fact is that if no trade deal is concluded by the deadline, the UK might have to hire 50,000 custom officers to cope with the forecasted 215m custom declarations due to be submitted annually. This is just the amuse-bouche before the main course, which is the loss of customers on the continent, particularly amongst more commoditised industries like agriculture. This awaits us if the tough façade does not produce the desired French capitulation over fisheries and we end up in yet another precarious scenario. 

Bottom line: Though change is seemingly upon us, the quality of that change is as always down to the finest of margins. A change of regime in the US would arguably be the best thing, regardless of party perspective. Although many of Trumps policy achievements will be difficult or impossible to reverse, and a steadier pair of hands might be a nice change after four years of tumult. In the UK, the prospective change is infinitely more difficult to predict, though most eventual outcomes seem like bad ones at present. The combination of Brexit and Covid-19 has been a source of remarkable difficulty for the UK business community and is likely to remain that way. The hope at this stage is that it does not become worse by forcing a no-deal outcome.


The week ahead

GBP

After another set of Brexit headline tennis, the trade-weighted Sterling index closed 0.4% lower last week as PM Johnson declared ‘trade talks are over’ after the EU’s two-day summit failed to make ground in trade negotiations. Johnson signalled the UK should prepare to leave the single market without a trade deal unless the EU changed its hard stance on trade negotiations. However, over the weekend, the UK government said it was prepared to amend the controversial Internal Market Bill that is due to face the House of Lords this week – a move that could rekindle trade talks. Sterling opens this week higher on optimism that trade talks will continue and the trade-weighted index edges closer to its 50-daily moving average. UK and EU chief negotiators will be speaking again on Monday afternoon. Bank of England Monetary Policy Committee members will be speaking throughout the week, potentially developing on the recent discussions of a negative interest rate policy in the UK.

  • Monday’s Rightmove House Price Index showed 1.1% price growth in October beating September’s 0.2% figure.
  • On Wednesday morning, September’s CPI figure is expected to read 0.5%, predicting a bounce back from the -0.4% number we saw in August. The year-on-year CPI figure is expected to read 0.6% while the Core CPI equivalent is forecast 1.3% growth.
  • On Friday, the October preliminary readings for Markit’s PMIs are expected to show slowing growth across the Manufacturing, Services and Composite readings. The levels are expected to read 53.0, 53.4 and 53.8 respectively.

EUR

The common currency closed last week 0.5% lower on a trade-weighted basis, as risk sentiment soured following doubts that a stimulus package from the US would arrive pre-election. However, over the weekend optimism of a state aid package was heightened. President Trump offered to dig deeper and offer more than his initial $1.8 trillion, favouring Nancy Pelosi’s plan. Broader market sentiment was also aided early this morning, as Chinese economic data suggested its recovery from the pandemic is staying on track following strong Retail Sales and Industrial production figures. Although the Euro opens the week in the green, downside risks remain as Covid cases across Europe continue to spiral out of control. This is raising concerns that more lockdown measures will hurt the private sector. ECB President Lagarde will be speaking on Monday afternoon.

  • Thursday’s forward-looking GfK Consumer Confidence survey for November is expected to read -3.0, indicating a forecast deterioration in consumer sentiment from the -1.6 level last month.
  • French Manufacturing Confidence for October is expected to remain unchanged at 96.
  • Friday’s preliminary October PMIs are expected to show the weakest reading in the services sector with France, Germany and the Eurozone aggregate all forecast to show contractionary readings. The manufacturing sector is expected to indicate expansion in France, Germany, and Eurozone as a whole, while the composite print reading for the Eurozone is expected to dip back into contractionary territory from last month’s expansion.

USD

Last week, the US Dollar climbed above its trade-weighted index’s 50-daily moving average, as broader market sentiment soured after doubts over whether a US fiscal package would arrive pre-election. As mentioned above, weekend developments renewed hopes that state aid would in fact arrive before the 3rd November election date. When combined with this morning’s positive economic data out of China, broader market sentiment is improved as we begin this week with a weaker US Dollar. However, Nancy Pelosi also set a Tuesday deadline for progress to be made on the state aid package, so a reversal of Monday morning’s US weakness is on the cards for the week ahead. Federal Open Market Committee members will be speaking throughout the week.

  • Tuesday’s Housing Starts for September is expected to tick higher from 1.42m to 1.46m new privately owned housing units.
  • Thursday’s Initial Jobless Claims is forecast to show 865k new Americans claiming unemployment, down from 898k last week. Although the reading is expected to tick lower, the indicator remains largely stagnant having consistently shown 800-900k readings for eight weeks, after coming lower since March.
  • Friday’s preliminary October PMIs are expected to show a slight uptick in the rate of expansion in the manufacturing sector to 53.5, while the services sector is expected to remain the same level of expansion at 54.6.

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