Morning Report: 5 December 2016

5th December 2016 By: Ranko Berich

GBP Sterling sold off slightly last night and early this morning, but with global markets now largely shrugging off the result of yesterday’s Italian constitutional referendum, the pound is back on the front foot against USD. This week the Supreme Court will hear the Government’s appeal on its right to activate Article 50 of the Lisbon Treaty and begin the process of leaving the European Union. The case will be broadcast live, and is expected to turn on how the 11 Justices interpret the Government’s powers of royal prerogative as they pertain to rights granted by parliament. Although an outcome is not expected until January, the case is extremely relevant for sterling due to the continued sensitivity of the pound to Brexit news. Markit’s Services Purchasing Managers Index rose to 55.2 in this morning’s release, indicating a rapid rate of output growth among the surveyed businesses. Markit’s latest PMI figures now point towards a growth rate of 0.5% in the fourth quarter, suggesting the economy continues to maintain momentum.

EUR The euro fell to its lowest level against USD since March 2015 early this morning as it became clear that the result of Italy’s constitutional referendum was a resounding “No” vote, and that Prime Minister Matteo Renzi would resign. But since then, the single currency has rallied powerfully and is currently trading at levels comparable to Friday’s against both USD and GBP. Aside from Renzi’s resignation, the implications of yesterday’s referendum are far from clear. Italy will need a new government, which President Sergio Mattarella will launch talks between the major parties in order to form. Early elections in 2017 do not seem out of the question if negotiations to form a new government do not proceed smoothly. Recapitalisation measures for troubled Italian bank Monte dei Paschi di Siena have also been called into question by the result, which may now be forced to seek government assistance to avoid being wound down under EU rules. Services Purchasing Managers Indices released this morning have been generally positive across the eurozone, and eurozone Retail Sales figures will be released at 10:00 GMT.

USD USD enjoyed a brief surge against EUR and GBP in the early hours of the morning, but is now back on the defensive, after the weighted index DXY lost momentum last week. Friday’s Non-Farm Payrolls report showed the creation of 178,000 jobs in October, although Average Hourly Earnings shrunk 0.1%. The results were nonetheless almost certainly good enough for the Federal Reserve, which is widely expected to raise interest rates at next week’s meeting. Today at 13:30 GMT The Fed’s Bill Dudley will speak. At 14:45 and 15:00 GMT Purchasing Managers Indices for the services sector will be released by Markit and ISM respectively. Later in the week, the Job Openings and Labour Turnover Summary will be released on Wednesday.

The loonie is trading slightly down this morning, having appreciated significantly over the course of last week off the back of rising oil prices, which in turn were driven by news of an OPEC supply agreement. Markets will assess the credibility of the OPEC announcements this week, but the week’s calendar also offers plenty of Canadian data. Trade Balance will be released tomorrow alongside the Ivey Purchasing Managers Index, and the Bank of Canada will announce its latest rate decision on Wednesday. Housing Market data including Housing Starts, Building Permits, and New House Prices will be released on Friday.

UK News

  • FT. Renzi to resign after referendum defeat. Italy faces new crisis after voters reject reform plans by wide margin. Matteo Renzi is set to resign after suffering a heavy defeat in a referendum on his flagship constitutional reforms, a result that plunges Italy into political crisis and raises fears of turmoil in its banking system. Italians rejected the constitutional changes — designed to ease gridlock in the country’s political system — by a wide margin of 59-41 per cent, according to early returns, in a vote marked by a high turnout of nearly 69 per cent.
  • Reuters. Bank of England’s Haldane warns against hasty rate hike. The Bank of England’s chief economist, Andrew Haldane, said on Friday it would be risky to raise interest rates too hastily and that he was comfortable with the BoE’s recent shift to a neutral stance on what its next monetary policy move should be. Britain’s central bank is grappling with the effect of a sharp fall in sterling since June’s vote to leave the European Union, which Haldane said was likely to push up inflation and also hurt growth over the coming year.