Morning Report: 26 September 2017

26th September 2017 By: Ranko Berich

GBP Sterling had a good day yesterday against the euro, but fell back slightly against USD. Politics and Brexit negotiations dominated the headlines, as Michel Barnier rejected attempts by Theresa May’s Government to change the topic of negotiations away from financial settlement and towards a transition agreement. Elsewhere, the UK Labour Party continued its transformation into a formidable opposition party, as Shadow Chancellor John McDonald announced a variety of new policies including nationalisation of Private Finance Initiative contracts. The Bank of England’s Financial Policy Committee released its latest policy statement, noting that the overall risks to financial stability had remained broadly unchanged since the last assessment. This morning, High Street Lending data will be released by UK finance, an industry organisation representing various financial services firms.

EUR The euro suffered yesterday, as markets digested a potentially bruising period of coalition negotiations for Angela Merkel as she attempts to form a new German government. Financial markets are not treating the event as a major geopolitical risk, as they did with the build up to French elections, as evidenced by the fact that spreads between German and comparable European government debt have remained largely unaffected. However, the uncertainty has created some sell pressure on the euro, which persists this morning. Mario Draghi testified to European lawmakers yesterday and struck an optimistic tone on the economy, while avoiding giving away any explicit hints about an end to quantitative easing.

USD The dollar pushed higher yesterday after the Fed’s Bill Dudley, who is a voting member of the Federal Open Market Committee, supported one more hike this year. Dudley was the first of seven speeches by voting Federal Open Market Committee members this week. This week’s schedule reminds of previous interest rate hike occasions in the US, when the Federal Reserve hinted towards a hike in a policy meeting and several FOMC members corroborated such possibility in subsequent speeches, smoothly laying down market expectations for a hike. We believe the Fed could be repeating this strategy again this week. The key lies on the Fed’s Brainard, as she is the leading voice of the “dove camp” in the Fed. Brainard speaks today at 15.30 BST, which could be a game changer for the US dollar. Yellen speaks after Brainard at 17.45.

CAD Brent crude oil prices rose yesterday to above $59/barrel, the highest price since June 2015, after Turkey’s Erdogan threatened to shut down the Iraqi Kurdistan pipeline since he opposed its independence referendum. However, CAD continues to fall against the US dollar, and USDCAD rose to new three weeks highs this morning, currently testing strong technical resistance level. If broken to the upside, CAD could continue to retrace over the month of October.

UK news

  • FT: Labour party threatens to nationalise PFI contracts Labour has vowed to nationalise private finance initiative contracts as part of plans to roll back private sector involvement in UK public services, in a move that could leave many PFI investors out of pocket. The announcement came as the CBI employers’ organisation said separate plans to nationalise the rail, energy and water industries and Royal Mail would “send investors running for the hills”. John McDonnell, shadow chancellor, announced in a speech on Monday to his party’s annual conference that “we’ll bring [PFI] contracts and staff back in-house”.
  • Reuters: UK banks must bolster defences against consumer loan defaults – Bank of England British banks have underestimated the risks from a surge in consumer borrowing and need to hold an extra 10 billion pounds of capital to guard against future dangers, the Bank of England said on Monday. Unsecured consumer lending is growing at nearly 10 percent a year, far faster than incomes, and the BoE said the low rate of defaults at present had more to do with strong employment growth than prudent long-term lending. Last month the BoE forecast the economy would slow next year, partly due to Britain’s looming departure from the European Union, and earlier this month it said it was likely to start raising interest rates in the coming months. “Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn,” the BoE said in a statement.