European Outlook: Asian stock markets are mostly higher, (Nikkei 225 closed up 0.97%) underpinned by a weaker Yen and the renewed uptick in oil prices yesterday after Russia signalled willingness to join the OPEC output cut. The front end WTI future fell back from highs, but is still trading above USD 51 per barrel. Hong Kong markets underperformed as developers came under pressure amid reports of restrictions in some Chinese cities designed to cool house price inflation. US and European stock futures are also down, signalling some correction on European bourses after yesterday’s oil induced rally. Bund futures meanwhile extended losses during after hour trade and comments from ECB’s Visco that an exit from QE would be data dependent will do little to dampen tapering concerns. ECB’s Mersch meanwhile repeated limits to negative interest rates. Still, with GBP remaining under pressure and inflation risks rising Gilts could well continue to underperform and the 10-year cash yield rise further above 1%. Released overnight, BRC retail sales showed the same store reading lifting 0.4% m/m in September, after a sharp drop in August. Otherwise the calendar focuses on German ZEW investor confidence, which is expected to improve further in October (see below)
FX Update: The dollar continued to trade firmer. EURUSD logged a low of 1.1119, putting last Friday’s two-month nadir into reach, while USD-JPY’s rally extended to a peak of 104.04, swinging last Thursday’s six-week peak at 104.16 into scope. Fed tightening expectations having been keeping the dollar bid. Our post-employment data survey of Fed watchers found all respondents expecting a 25 bp rate hike at the December 13-14 policy meeting. Japanese markets and yen market liquidity returned today following yesterday’s public holiday. The yen traded mixed, losing ground to the dollar and euro, buy rising versus the Australian dollar and pound. Sterling came back under the cosh amid continued Brexit angst. The London Times headlined that a “hard Brexit” could cost GBP 66 billion a year.
EU not yielding to May’s “threat”. The U.K. may have hoped that by making clear that Prime Minister May is willing to risk losing access to the single market in order to achieve control over migration from other EU countries the rest of the EU may prompt a softening of the official EU stance, but it is clear that there is no appetite for a change in the treaties and a splitting of the EU’s four freedoms, which include both single market access and the free movement of labour. So the official EU stance remains unchanged to what if was before the Brexit referendum, when then Prime Minister Cameron tried to get further concessions for the U.K. Indeed considering the likely consequences of a change to the EU’s fundamental principles that were enshrined in the treaties, the EU clearly stands to lose more both economically as well as politically, if it were to set a precedence and abandoned the spirit of the treaties to keep the U.K. in the single market.
Fedspeak: Evans (long time dove) speaking in Sydney overnight – Risk of inflation not returning to the FED’s 2% “within acceptable time period” and not rising to 2% goal until roughly 2020. US not yet at full employment and “would not be surprised if there were a US rate hike in December”. The US Economy is on a strong footing, recent jobs report was a pretty good number the Election is not a bar to November hike, …but would “prefer to wait for more economic data”. Strong USD is a challenge for manufacturers, but has lowered import prices.Publication source