Morning Report: 24 May 2017

24th May 2017 By: Ranko Berich

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GBP. Sterling remains under pressure against USD this morning, as the nation’s terror threat level has been raised to “critical”, only the third time this step has been taken. It is worth noting that no general sell off has set in for the pound, which was able to take advantage of yesterday’s euro sell off to strengthen against the single currency. General election campaigning remains suspended, with the main focus of investigative efforts believed to be on establishing if Monday night’s attacker acted alone. No major sterling data will be released today.

EUR. The euro finally pared back some of the explosive gains it has seen over the last couple of weeks yesterday, selling off against USD and GBP. Yesterday’s economic data were actually very positive, with European Purchasing Managers indices rising further into growth territory and the German IFO Business Climate survey rose to its highest level since 1991. German Finance Minister Wolfgang Schäuble made comments echoing Angela Merkel’s criticism of the effects of loose monetary policy on the German economy, although Schäuble did acknowledge the European Central Bank’s independence and that they would not be seeking his advice. The subject of Schäuble’s ire, ECB President Mario Draghi, will speak today at 14:35 BST.

USD. After a rough start to the week USD showed signs of life yesterday, finally rallying against the euro despite an afternoon of mixed data releases. Markit’s Services Purchasing Managers Index rose further into positives, but its equivalent for the Manufacturing sector fell slightly, while another survey based index, the Richmond Manufacturing Index, fell sharply and New Home Sales contracted after a surge in March. The Trump administration also released more details about its proposed budget yesterday, featuring some extraordinarily sharp spending cuts to complement its aggressive tax reductions. Today’s main release will be the latest meeting minutes from the Federal Reserve at 19:00 BST. Minutes rarely signal a headline change in Fed policy, but the release will nonetheless be a test of if the Fed’s earlier suggestions of up to three more rate hikes this year remain credible.

CAD. The loonie weakened overnight as USD was well bid, despite a firm tone in crude oil trading ahead of today’s crucial OPEC meetings. The producer’s cartel is widely expected to extend its current production cap to combat persistent oversupply in crude oil markets. The Bank of Canada will also announce its latest rate decision today at 15:00, although with no change likely to policy the loonie may end up ignoring the release, especially if news emerges from the OPEC meeting.

UK news

FT: China’s sovereign debt downgraded by Moody’s. Beijing condemns rating agency decision that could curb foreign appetite for bonds. China’s finance ministry chastised Moody’s on Wednesday after the US rating agency downgraded Beijing’s sovereign credit rating, highlighting investor concerns over rising debt and the slow pace of economic reforms intended to transform the country’s growth model. “Moody’s has overestimated the difficulties faced by China’s economy and underestimated the government’s ability to deepen reforms,” the ministry said in response to the downgrade, which initially rattled China’s stock markets and currency.

Reuters: UK’s consumer slowdown ripples through Britain’s economy. The Brexit squeeze on British consumers has hurt the government’s finances as well as retailers, data showed on Tuesday, indicating that the economy’s slowdown at the start of the year is now being felt more broadly. A stalling of sales tax revenues, a barometer of the economy, helped to widen Britain’s budget deficit by more than expected, official data showed. A separate survey showed business confidence among retailers declined at the fastest pace since 2012, around the last time Britain flirted with recession.