Morning Report: 2 October 2017

2nd October 2017 By: Ranko Berich

GBP Sterling opened the week higher against the euro, but is falling further against the US dollar. Theresa May is under pressure to fire the Foreign Secretary after he suggested over the weekend that the Prime Minister would be out within a year, he also again challenged the last round of the Brexit negotiations. This is the second time he has done so in less than two weeks. Last week’s poor data will weigh on sterling this week as markets digest its implications for the Bank of England. Consumer debt data was especially worrisome, as it showed a year-on-year increase of 9.8%. Manufacturing survey data also disappointed this morning, sending sterling to new two-week lows.

EUR The single currency opened lower against most of the G10 currencies due to yesterday’s Catalan referendum. Puigdemont, the Catalan President, challenged the Spanish constitutional court decision after the court called the referendum illegal. Hundreds were injured as independance supporters tried to vote, whilst the Spanish police forces had instructions to access polling stations and confiscate the ballot boxes. A few hours before the voting began, the Catalan government allowed people to vote in any polling station, leading to irregularities such as people reported voting twice. Other irregularities were also reported such as a possible ballot box full of pre-completed ballots and anomalies in some towns census data. Nonetheless, yesterday’s violence was not justified did nothing but increase the Catalan pro-independence sentiment and further worsened the problem. Prime Minister Mariano Rajoy will have an emergency meeting today.

USD The dollar is stronger versus all the G10 FX this morning after last week’s schedule of Fed speakers pencilled in a third rate hike in 2017. The Fed’s Patrick Harker said on Friday he had started to see some wage pressure, something the Fed has been impatiently awaiting as a signal for higher inflation in the future, supported by a tighter labour market. However, Friday’s inflation data did not seem to reflect this. Another factor for USD strength appears to be Trump’s expected announcement of the next Fed Chair. US yields jumped on Friday after former Fed official Kevin Warsh met with the President, suggesting markets see him as a hawkish option. Several Fed officials will speak again this week, including Chair Janet Yellen, which could give further insight about the Fed’s expectations. Manufacturing survey data will be released at 15.00 BST today.

CAD The loonie continues to fall versus the dollar and has broken minor technical resistance on its way. USDCAD currently trades at 1-month highs. Worse than expected Canadian Gross domestic product on Friday suggests that the Bank of Canada will be more cautious in coming months, this is definitely weighing on the loonie. Manufacturing survey data will be released at 14.30 BST.

UK news

  • FT: Catalonian president close to declaring independence. More than 760 people injured in clashes as Catalans defy Madrid over vote. Catalonia’s president has signalled that the region is on course to declare independence from Spain in the coming days after more than 2m people defied attempts by Madrid to halt Sunday’s referendum to back independence. Carles Puigdemont said that the region’s citizens had “earned the right to have an independent state” after 90 per cent of the 2.26m votes cast — out of just over 5m eligible voters — were in favour of independence. “My government, in the next few days, will send the results of today’s vote to the Catalan parliament, where the sovereignty of our people lies,” he said. The parliament had previously promised independence within 48 hours of a Yes vote. A declaration of independence would have no legal force, as the Spanish constitutional court has ruled the referendum illegal and invalid. Such a declaration was also likely to have no backing from the international community.
  • Reuters: UK consumer credit picks up in August as Carney points to lending risks. Consumer lending in Britain rebounded in August and rose by the largest amount in three months, Bank of England figures showed on Friday, shortly after Governor Mark Carney said banks had been lending too much. Consumer credit increased by 1.583 billion pounds last month, compared with a rise of 1.166 billion pounds in July. A Reuters poll of economists had pointed to a reading of 1.35 billion pounds. Earlier on Friday Carney said there was no overall debt bubble in Britain but that the BoE was worried about “a pocket of risk” in consumer debt that has been growing at about 10 percent a year. “We think banks have been giving too much credit … and not been as disciplined as they should be in their under-writing standards and their pricing on this debt,” he told BBC radio. Consumer lending was 9.8 percent higher in August than a year ago, Friday’s figures showed, the same growth rate as in July.