Morning Report: 3 October 2017

3rd October 2017 By: Ranko Berich

GBP Sterling suffered yesterday after poor manufacturing survey data showed no improvement whatsoever in the sector. The sector was expected to shine after Brexit, due to a weaker sterling and weaker related imports, but no sprouts can be seen yet. Moreover, yesterday’s data magnified the doom and gloom observed last Friday when Gross Domestic Product data was revised downwards and consumer debt and trade deficit data skyrocketed. If it was not enough, a new political crisis is brewing inside the Tory party with Foreign Secretary Johnson challenging the Brexit negotiations and betting on Theresa May’s departure timing as Prime Minister. Discouragement continues today with the construction survey data, which fell into negative territory for the first time in more than a year.

EUR The single currency fell overnight to a 6-week low against the dollar but is recovering at the time of writing after reaching a technical and psychological support level earlier this morning. The euro weakened yesterday as the Catalonian referendum brought back the Eurozone’s political crisis spooks. The conflict appears to have calmed down for the moment as the Catalan government seeks EU mediation in any future negotiations, in an attempt to push the Spanish central government to start to dialogue. France, Germany and the Netherlands back the Spanish central government chase of the state of law, whereas the EU Commission asked Spain not to use violence again. Today will be a quiet day in terms of macro data, and the euro will fluctuate on sentiment and the evolution of the Catalan crisis.

USD The dollar advanced yesterday versus all G10 currencies favoured by impressive manufacturing survey data. The ISM Manufacturing Purchasing Managers Index jumped to a 13-year high, with the reported level of new orders being particularly strong. This is a positive albeit tentative indicator that US growth for the rest of 2017 will keep pace, giving further ammunition for Federal Reserve members who are in favour of further interest rate hikes sooner rather than later. No data will be released today in the US, but Jerome Powell, voting member of the interest rate-setting Federal Open Market Committee, will speak at 13.30 BST.

CAD The trend in USDCAD is now clearly reversed and continues to move upwards in October. 12 sessions of the last 15 have seen the loonie weakening against the US dollar, and it appears that this trend has room to go. No data will be released today in Canada, and the loonie will probably continue to weaken as sentiment remains negative and crude oil does little to help.

UK news

  • FT: Catalan president urges EU to mediate after independence vote. Carles Puigdemont says region wants to avoid ‘traumatic break’ from Spain. The Catalan government said it wanted to avoid a “traumatic break” from Spain and appealed to the EU to help mediate with Madrid, in signs it was holding back from an early declaration of independence after Sunday’s referendum on secession. Catalan president Carles Puigdemont said that after Sunday’s vote, when 90 per cent of the 2.3m ballots cast were in favour of independence, Catalonia now had the right to be free from Spain. But he hinted that this would not happen immediately. “There is no button to push for independence, it does not exist,” said Mr Puigdemont at a press conference. He called on the EU to help broker negotiations: “It is not a domestic matter?.?.?.?It’s obvious that we need mediation.”
  • FT: UK construction activity falls for first time in 13 months. “Fragile confidence and subdued risk appetite” in the commercial building sector caused activity in the UK’s construction sector to decline for the first time in more than a year in September, according to a closely-watched survey The purchasing managers’ index for the construction sector dropped from 51.1 to 48.1, below the key 50 level that indicates expansion over the month. Economists had expected slight growth with a reading of around 51. The data follow similarly disappointing results from IHS Markit’s survey of the manufacturing sector, released on Monday, and will fuel fears that waning confidence is causing an economic slowdown. The PMI surveys question firms on factors such as new orders, hiring and inventories to gain a picture of the overall health of a sector, and are seen as useful early indicators of growth.