Morning Report: 4 October 2017

4th October 2017 By: Ranko Berich

GBP Sterling appears to have stabilised after several sessions of drops against EUR and USD. Macro data over the last few days has been awful for the UK’s overall economic picture. Construction survey data contracted yesterday for the first time in more than a year, showing a strong contraction in commercial building, dragged by the underperformance of the retail sector this year, a contraction in the civil engineering work and a steep slowdown in housing building. These figures caught markets by surprise and add up to the poor manufacturing data on Monday and the downward revision of the gross domestic product figures last Friday. However, the Services Purchasing Managers Index, which represents almost three quarters of the UK economy, did manage to slightly beat expectations this morning, with a 53.6 reading against a 53.2 forecast providing some respite.

EUR The euro has recovered some of the lost ground over the last couple of days against GBP and USD, favoured by data and a strong technical support levels. Services Purchase Manager Indices kept rising, albeit marginally, quickly approaching previous five year highs. The data and positive sentiment helped the euro to avoid being weighed down too much by the ongoing Catalan crisis. The King of Spain spoke gave a speech yesterday—the King only speaks once a year normally and rarely intervenes in political matters—condemning the anti-constitutional behaviour of the Catalan leaders, whom proceeded with an illegal referendum over the weekend, though the heavy-handed tactics of the police in attempting to stop the vote drew international criticism. The fact that the King has felt the need to intervene highlights the extremity of the situation Spain is currently facing. This is also reflected in Spanish sovereign debt yields—10-year tenor, which have skyrocketed 18 basis points this week, to 1.78%. No major data will be released today.

USD The dollar remained out of the spotlight yesterday as other developments in the Eurozone dominated the headlines. However, this is likely to change today as important data is released later this afternoon. The private estimate of Friday’s non-farm payrolls by the agency ADP is released at 13.15 BST, and will provide some insight on how hurricane Irma affected hiring last month. Expectations for job creation on September are quite low for the same reason, but the extent to which hiring slowed down are completely unknown. The non-manufacturing purchase manager index by the agency ISM will be released at 15.00 BST, and could be a significant USD mover.

CAD The loonie finally took a break this morning after hitting technical resistance and observing some taking profit activity. However, CAD remains completely out of the spotlight, and will remain for the rest of the week, as events elsewhere dominate the headlines. Crude oil inventories will be released later this afternoon at 15.30 BST.

UK News

  • FT. Spain’s king censures Catalonia in rare political intervention Felipe VI accuses secessionists of placing ‘themselves outside the law and democracy’. King Felipe VI of Spain on Tuesday night voiced harsh criticism of the “irresponsible” Catalan government for its independence campaign, in a rare televised speech that stressed the crown’s commitment to the unity of the country. Catalonia’s authorities, he said, “have placed themselves outside the law and democracy, they have tried to break the unity of Spain and national sovereignty”. Offering firm backing to the Spanish government of Mariano Rajoy, King Felipe said it was the “responsibility of the legitimate powers of the state to ensure the constitutional order”.
  • Reuters. Brexit uncertainty prompts shock British construction contraction Britain’s construction companies in September reported the sharpest fall in activity since just after June 2016’s Brexit vote, as clients put projects on hold due to uncertainty over the economy. Although construction makes up just 6 percent of Britain’s economy, the survey suggested it was likely to drag on official third-quarter growth figures, just as the Bank of England gets ready to raise interest rates. The IHS Markit/CIPS construction purchasing managers’ index (PMI) sank to 48.1 in September from August’s reading of 51.1, its lowest since July 2016 and far below all forecasts in a Reuters poll of economists.
  • FT. UK service sector growth increases but confidence fades while costs rise Firms in the UK’s important services sector reported better than expected growth in September in a closely-watched survey, but warned of potential difficulties ahead as new business growth fell to its lowest level in more than a year. The purchasing managers’ index increased from 53.2 to 53.6 – still weaker than its average over the first half of the year but better than economists had expected and comfortably above the 50 level that indicates expansion. The solid figures for the sector – which accounts for 80 per cent of the UK economy – will come as a relief after surveys of the manufacturing and construction sectors disappointed earlier this week. Manufacturers reported slower growth and weaker confidence across the board, while construction firms reported their first contraction in more than a year.