Morning Report: 29 May 2018

May 29, 2018

GBP. Sterling had a quiet start to the week yesterday, as the UK enjoyed a Bank holiday. With little in the way of top-tier data for sterling until Friday’s Manufacturing Purchasing Managers Index, the market focus will likely be on Brexit negotiations ahead of the Brussels summit on 28-29 June. The Financial Times reports that “The Treasury and Bank of England are at loggerheads over the future of the City of London regulation after Brexit”. Reportedly the split is over BoE opposition to becoming a “rule taker”, as they would be required to under several of the most likely Brexit scenarios for maintaining maximum access to EU markets. Chancellor Philip Hammond reportedly wants to keep Britain close to the EU rulebook to ensure maximum access for city institutions at the expense of the BoE’s autonomy, should proposals for mutual regulatory recognition continue to fall on deaf ears in Brussels.

EUR. Euro came under broad pressure yesterday as political tension flared up in two of its Mediterranean members; Spain and Italy. The process of government formation came to a crashing halt in Italy with proposed finance minister Savona rejected by President Mattarella, increasing the likelihood of fresh elections. Elsewhere, Spain’s Parliament agreed to debate a vote of no confidence in prime minister Rajoy on Thursday, with a vote scheduled the day after. The sudden increase in political risk was reflected in the sovereign bond market, which saw 2 year Italian yields break through the 1% barrier for the first time since the Euro crisis in 2014. Eurozone M3 Money Supply will be released today at 9:00 BST.

USD. The greenback performed reasonably well yesterday extending its gains versus most of the G10 currencies but did fall back against JPY, which benefited from general risk-off sentiment being exacerbated over the weekend by European politics. Today at 15:00 BST Consumer Confidence figures will be released, followed tomorrow by revised Gross Domestic Product growth. The Fed’s preferred inflation measure, Core Personal Consumption Expenditures prices, will be released on Thursday ahead of speeches by the Fed’s Bostic and Brainard. The Non-Farm Payrolls report will round out the week on Friday, with Average Earnings expected to show another month of strong growth.

CAD. The loonie stemmed losses yesterday relatively well, despite oil prices taking another hit. Friday Russia and Saudi Arabia announced they were discussing the possibility of raising oil production by 1 million barrels a day, in order to counteract the supply shortage from Venezuela. But, the final decision will be taken in June, likely during the next OPEC meeting on the 22nd. Despite no data released today, the Canadian weekly calendar looks denser, with the Bank of Canada’s latest rate decision on Wednesday and Gross Domestic Product data out on Thursday.

UK news

  • Financial Times: Italian bonds suffer rout on political turmoil Italy’s bond market suffered a steep sell-off on Tuesday, sending the yield on the country’s two-year bond to the highest level in more than four years as concerns about political turmoil in the eurozone’s third-biggest economy intensify.
  • Financial Times: Euro falls below $1.16 for first time since late 2017 The euro on Tuesday slipped below the $1.16 level for the first time since November 2017 after a sell-off in the Italian debt market ricocheted into forex trade.
  • Reuters: Manufacturers ask Britain to drop ‘max fac’ post-Brexit customs proposal  British manufacturers on Tuesday said the government should abandon one of its main customs proposals for after Brexit, criticising the so-called “max fac” option as unrealistic and a waste of money.

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