Market Review – Fundamental Perspective (2024)

• ZAR sharply reverses its initial sell off after South Africa’s downgrade
  
• Bank of England says stress test shows banks can withstand disorderly Brexit
• Focus turns to Fed Chair designate Powell who testifies in Congress today

Markets were relatively subdued yesterday. Asian equities fell in line with the decline in commodities, with crude oil falling for a second day after reaching two year highs and ahead of OPEC’s meeting in Vienna on Thursday
In FX, JPY reversed its gains after yesterday’s risk rally which was partly fueled by reports (Kyodo News) that Japan detected radio signals suggesting that North Korea is preparing for a missile launch. Meanwhile, the Bloomberg dollar index was little changed as the US tax debate gets underway.
While one downgrade to South Africa’s local-currency rating was largely expected, yesterday’s sharp reversal in USDZAR happened quicker than expected after ZAR sold off initially on Friday.
Notable supply of USDZAR above the 14.00 level catalysed the pair to sell off and trade through trend line support at 13.80 (Bloomberg September low). Our traders expect USDZAR to trade in line with broader USDEM until the ANC conference in mid-December.
The Bank of England published its annual stress tests results alongside its Financial Stability Review looking at the health of UK banks. Five of the seven banks passed the health check but none need to raise capital. The Bank of England also raised the countercyclical capital buffer rate to 1%.
In the US, new home sales for October surprised to the upside rising 6.2% m/m to 685k, taking sales to the highest level since 2007. Also, New York Fed President William Dudley - who is retiring from the central bank - said in a speech yesterday that the US economy is running at close to full employment and growth is expanding at an above-trend pace.
Focus now turns to Fed Chair designate Powell who testifies in Congress today. In remarks released ahead of his hearing by the Senate Banking Committee today, Powell said he expects the central bank to continue raising its benchmark interest rate and trimming its balance sheet under his leadership. Any further views from Powell today will be important as the market begins to assess the outlook for monetary policy under his leadership.

• US equities make record highs after the US tax cut plan was approved by the Senate Budget Committee
  
• GBP supported by Brexit headlines
• Focus on Bank of England and Fed Speakers today

Asian equity markets were mixed overnight after North Korea’s latest ballistic missile launch. US equities traded higher yesterday after the US tax cut plan was approved by the Senate Budget Committee, with the S&P 500 making new record highs. The 10y UST yield closed down just over 1bp as Fed Chair nominee Jerome Powell spoke at the Senate Banking Committee.
Fed Chair nominee Powell’s speech gave no significant new insights into his stance on monetary policy or regulation, commenting in the testimony that the case for a December rate hike “is coming together”.
In FX, GBP experienced a volatile session with GBPUSD taking back intra-day losses after reports that the UK and EU have reached an agreement on the Brexit bill (Telegraph). Despite the report being denied by a Government source - ‘Brexit Deal Not Done’ – GBPUSD remains above 1.3400. Focus turns now to Bank of England Governor Carney speaking at 14.00 and Deputy Governor Ramsden speaking at 14.45.
Our traders see GBPUSD resistance 1.3660 (YTD area highs) with support around the 1.3200-25 area. EURGBP support at 0.8790 and 0.8730 with resistance around the 0.8980-0.9050 area.
In data yesterday, US home prices maintain momentum in September and consumer confidence unexpectedly improved in November to 129.5, marking a 17-year high. With the current strong momentum broadly based, the report suggests that household confidence remains on a strong footing and, in our view, the buoyant consumer confidence conditions as constructive for consumer spending in Q4 and beyond.

• North Korea Threat? What North Korea Threat?
  
• Investors Shrug Off North Korean Threat
• GBP Hits Two Month High on Divorce Bill Rumours

US equity markets are on course to build on Tuesday's gains as we near the open on Wall Street, with the latest North Korea missile launch doing little to deter investors.
Not so long ago, the threat of escalation caused by such action would send investors fleeing for safe havens but as time has gone on and nothing has escalated beyond tough talk, investors have become less sensitive to the tests. Even Gold, the traditional safe haven, has seen only minor flows on the back of the launch and continues to trade below $1,300 which has been a notable resistance level for the yellow metal.
Sterling is trading at a two month high against the dollar this morning, after reports that the UK has agreed a divorce settlement with the EU following months of negotiations. While nothing has been explicitly confirmed and is unlikely to be given the tight political spot Theresa May finds herself in, if this is correct then this would be a major step towards moving negotiations on to transition deals and a future trade agreement.
Progress has come at a snail's pace so far and this agreement, if true, comes as May is put under substantial pressure by businesses demanding assurances on the future relationship with the EU and how it will impact them. While an agreement will come as a relief, as reflected in the rise in the pound, there's still a long way to go and there's likely to be many many more difficulties faced along the way. This is the first of many large hurdles on the way to Brexit, but it's a very important first step.

OPEC and Non-OPEC Group Agrees to Extend Production Cuts Until the End of 2018
At the 173rd Meeting of the OPEC Conference, OPEC members agreed that the global crude oil market is moving in the right direction. Production adjustments to date are having their desired effect, with inventories falling by half their target amount in 2017.
This reduction in inventories has resulted from a combination of stronger-than-expected demand and high rates of compliance among the OPEC and non-OPEC group with respect to their production quotas.
The pace of inventory reduction is expected to slow (or even reverse course) as we move through a period of seasonally weaker demand, but OPEC anticipates inventories to fall to their 5-year average by the end of 2018 with the extension of supply cuts.
Accordingly, both OPEC and the group of non-OPEC producing countries agreed today to extend the production cuts until the end of 2018. The group intends to assess market conditions next June to consider whether any further adjustments are needed.
Third-party media reports indicate that today's extension of supply cuts includes Libya and Nigeria for the first time, with an agreed upon collective cap higher than current combined production levels. As such, the inclusion - which will take effect in January - will not have an impact on current production levels.
Prior to today's meeting, Russia had been intent on discussing the exit strategy in order to gain some clarity on what comes after the market is in a more balanced position. Meanwhile, the Saudi Oil Minister indicated that it is too early for those discussions given that there is still a large amount of inventory that must be eliminated. As of yet, there has been no mention of how these output cuts will be phased out once the market is in balance.

• USD opens the week higher after the US Senate passed its tax bill
  
• Big week for UK and GBP ahead as PM May heads to Brussels
• US nonfarm payrolls in focus this week

Global equity markets came under pressure towards the end of last week on news that former US national security advisor Flynn struck a deal to cooperate with special counsel Mueller’s investigation into Russian interference in the US election.
However, US equities were buoyed by the potential for tax reform and the US Senate passed their version of the tax reform bill after markets closed on Friday. USD has opened higher this morning as a result whilst Asian equity markets are mixed.
The US Senate passed its version of the tax bill but the bill differs from the one passed by the House in early November and thus the two bills will need to be reconciled in party conference negotiations before a final bill can be signed into law by Trump.
Barclays Research maintains its view that tax cuts would likely lead to “… modest near-term USD strength…”.
This week is expected to be a big week for the UK and GBP as PM May heads to Brussels today to meet Barnier at 12.15. The UK’s payment to the EU, EU citizens’ rights and the Irish border are three of the key points where sufficient progress needs to be made before next week’s EU summit to ensure that trade talks can begin early next year.
GBPUSD support comes in at 1.3380 ahead of 1.3200 with resistance at 1.3550 and 1.3660. In EURGBP, supports is found at 0.8775 with resistance at 0.8840-0.8860.
In Germany, Chancellor Angela Merkel and the leader of the Social Democrats agreed to engage in coalition talks which are likely to continue into Q1-18.
The key data point this week is US nonfarm payrolls which Barclays Research expects will “…show strong performance (200k), following two months of disruptions by the hurricanes…”.

• Tax Package Next Steps: Reconciling Differences
  
• How Does the Process Unfold from Here?
• What Are Major Differences Between the House and Senate Bills?

Late last week Senate Republicans passed their version of a $1.4 trillion tax package, while the House passed its version on November 16. While progress on getting a final tax package passed has been made, there is one final hurdle before enactment: the two bills must be reconciled and a single version passed through both the House and the Senate. In this report, we summarize the next steps in the legislative process and highlight the possible sticking points between the two bills. We conclude with a discussion of the bills' fiscal and economic impact.
We remain comfortable with our call for passage of a tax package in the first quarter of next year, with the cuts retroactive to January 2018. Our view is that the final package will rely on temporary cuts (either individual, corporate or both) and will likely end up looking more like the Senate's tax package rather than the House package.
The next step in the process is for the House and Senate to vote on conferees to a joint House and Senate conference committee. This committee will be charged with reconciling the differences between the two tax bills. We expect this process to take some time given several differences between the two bills. As the negotiations unfold, we see the final bill looking more like the Senate bill than the House bill given the very tight vote margin in the Senate. Complicating matters is a deadline to fund the government by December 8. It is expected that Congress will extend funding via a continuing resolution (CR) through December 22. This short-term CR would likely eat into the time needed to clear the final tax package through both chambers, since Congress will need to again come up with another funding bill before December 22. We maintain the view that the final package will likely be passed in Q1-2018.
Permanence of Individual Tax Cuts
One of the biggest possible sources of contention in reconciling differences will likely be the temporary nature of Senate tax cuts. In the House bill, a $300 family tax credit expires after 2022, but all other individual tax changes in the House bill are made permanent. In the Senate, however, all individual tax breaks including the larger standard deduction would expire after 2026. This expiration would also be true of the repeal of the state and local deduction (SALT). Essentially, the individual tax code would "snap back" to its current policies under the Senate bill. While this permanence issue may be a point of contention, there are few choices to work around Senate rules prohibiting a deficit impact beyond a 10-year window. Thus, the conference committee can accept the Senate's individual tax cut expiration, or it could allow some of the corporate tax cuts to expire.

• Global equity markets fall and the US yield curve continues to flatten
  
• Brexit negotiations hit an impasse ahead of next week’s EU summit
• Trump expected to announce his decision on the US embassy in Israel

European and US equity markets finished the day marginally lower yesterday as investors assessed the implications of the proposed US tax cuts. Meanwhile, the US yield curve flattened further, USD had a mixed day and copper prices declined after data showed a build-up of inventories.
Asian equity markets were sharply lower as of midday local time weighed by losses on Wall Street as well as falling metals prices and monetary policy concerns in China.
Brexit negotiations seem to have hit an impasse ahead of the crucial EU summit next week. The Irish border remains one of the most contentious issues as the DUP opposes special regulatory treatment for Northern Ireland
PM May has come under renewed pressure from a number of sources, not least from key members of her own party who fear that she is trying to force through a soft Brexit.
GBPUSD support comes in at 1.3350 with resistance at 1.3550 ahead of the highs of the year in the 1.3660 area. EURGBP support is found at 0.8730-50 with resistance at 0.8860.
President Trump is expected to announce his decision on the location of the US embassy in Israel today and the possible recognition of Jerusalem as Israel’s capital would likely raise geopolitical concerns and weigh on risk sentiment.
UK services PMI for November came in weaker than expected at 53.8 as higher costs weigh on businesses’ margins and their ability to expand. As in previous months, Brexit uncertainties and the household income squeeze are further headwinds to business confidence.
Today there are central bank meetings in Canada, India and Brazil. Barclays Research expects the BoC and the RBI to keep rates unchanged, while in Brazil we forecast the BCB to cut its reference rate by 50bp as well as provide guidance about the possible end of the easing cycle.

• President Trump recognized Jerusalem as capital of Israel
  
• The BoC and RBI kept policy unchanged, whilst the BCB cut rates
• PM May remains under pressure as Brexit negotiations are at an impasse

Global equity markets drifted lower for a fourth day after a bout of profit taking this week in a fairly quiet session. In FX, CAD declined (vs. the USD) after dovish commentary from the Bank of Canada, whilst AUDUSD fell to the lowest since June after October trade data missed estimates.
President Trump formally recognized Jerusalem as the capital of Israel yesterday and announced that he will initiate the relocation of the US embassy from Tel Aviv to Jerusalem, despite warnings from leaders across the globe that the move would undermine peace efforts. The announcement heightens political uncertainty within the region but ILS price action has remained stable and constructive in a quiet flow environment.
The Bank of Canada kept policy unchanged, retained its cautious tone and remained data dependent. We reiterate our call for the BoC to hike late in Q1 18 or early in Q2 if NAFTA risks dissipate, with the risk of a significant delay if they do not. The market is pricing a little more than two hikes on a one-year horizon, bringing downside risk to the CAD in case of disappointment.
The RBI also stayed on hold, but the BCB cut rates. Both moves were expected, with the Indian central bank maintaining a neutral monetary policy stance, albeit with one member of the MPC voting for a 25bp cut. Meanwhile, the BCB cut the Selic rate 50bp, to 7.0%, reflecting the prior decline in inflation.
In the UK, PM Theresa May struggled to agree a Brexit deal with Northern Irish unionists which led Ireland’s prime minister to warn that a divorce settlement might not be completed until early next year. PM May continues to remain under pressure, with a number of sources reporting that David Davis allies are launching bid to find her replacement.
GBP flow dynamic remains two-way with GBPUSD support coming in at 1.3350 ahead of 1.3200. Meanwhile, resistance is at 1.3550 ahead of the highs of the year in the 1.3660 area. EURGBP support is found at 0.8730-90 with resistance at 0.8860.

• UK-EU reach a crucial deal ahead of next week’s EU summit
  
• The US Senate passed a bill to prevent a government shutdown
• US non-farm payrolls in focus today

Global equity markets generally rose yesterday and USD nudged higher although GBP was the clear outperformer in G10 space after a UK-EU Brexit deal was reached in Brussels this morning.
The EU Commission announced on Friday morning that enough progress has been made to allow the UK-EU negotiations to proceed to phase two which will lay out their future relationship. On the issue of the Irish border, PM May said that there would be no hard border and that the Good Friday Agreement would be upheld.
Although the developments are a big success for May, hard details on the Irish border have yet to be resolved and the role of the ECJ remains unclear.
GBPUSD rallied on the news and climbed back above 1.3500 in early morning trading. Meanwhile, EURGBP has dropped below 0.8700 for the first time since June.
The US Senate cleared a two-week stopgap funding bill yesterday evening, one day before the deadline to avoid a government shutdown. The bill will keep the government funded through December 22 but a longer-term solution to the issue is likely to end up being tied to an increase in the debt limit.
The US employment report will be in focus today and Barclays Research forecasts non-farm payrolls “…to have increased to 200k, in line with the average monthly increase during the recovery…”. This is the first release in a while that should be free from any hurricane distortion.
In the UK, we get industrial and manufacturing output this morning. Barclays Research expects “…industrial production to come in flat m/m as growth in manufacturing is offset by other components. In terms of sectors, we continue to expects the consumer goods sector to print negative, while capital and intermediate goods support total production…”.

• Global equity markets remain supported
  
• Key data releases, BoE meeting and EU Summit in focus in the UK
• US House-Senate to begin tax bill reconciliation

Global equity markets broadly rose last week amid economic data suggesting the ongoing global expansion is still on solid footing. US non-farm payrolls came in higher than expected at 228k indicating that employment momentum remains strong in the US.
USD has opened this week marginally softer against G10 and trading volumes have been muted. Meanwhile, Asian equity markets are largely higher as of midday local time.
This week is a busy week for the UK and the main focus is expected to fall on the EU Summit in Brussels starting Thursday. The EU Council is expected to agree with the recommendation by the European Commission that trade talks can begin given that sufficient progress has been made.
Barclays Research believes that “…the long-term trading relationship between the EU and the UK is far from clear, and moving on to the next phase of the negotiations would not, in itself, be a major boost for the UK, but merely a sign that negotiations remain on track…”.
On the data front, we get UK CPI on Tuesday as well as average weekly earnings and the unemployment rate on Wednesday but these are likely to be overshadowed by politics
GBPUSD remains in its 1.3220-1.3550 range for now. Meanwhile, EURGBP finds support at 0.8690 with short-term resistance around the 200 DMA at 0.8803.
A number of central banks will meet this week including the Fed (Wednesday), the BoE (Thursday) and the ECB (Thursday). The Fed is widely expected to hike rates (>90% priced) whereas the BoE and the ECB are likely to remain on hold.
In South Africa, Ramaphosa is expected to become the ANC president at the party conference on Saturday according to preliminary results which has fueled expectations that the February Budget could show an improved debt-to-GDP path but considerable risks remain.