Morning Report: 9 January 2017

9th January 2017 By: Ranko Berich

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  • GBP.  Sterling is getting hammered this morning after Theresa May commented yesterday that the UK will leave the single market, and that she is not interested in trying to “keep bits of membership”. Her comments were, in part, a response to Sir Ivan Roger’s accusations that the Prime Minister’s thinking was muddled in relation to the UK’s Brexit plans. As a result, the likelihood of a much harder Brexit has been quickly priced in sterling’s crosses and the pound has dropped to October’s lows against the dollar, and mid-November lows against the euro. Earlier today was released the Halifax House Price Index, which rose to a 9-month high. However, any positive fundamental data will probably be eclipsed by the expectations of a harder Brexit ahead of the Supreme Court’s decision.
  • EUR.  The euro is stronger against its peers this morning, despite figures showing that the rate of unemployment in Italy has risen to 11.9%, and that the monthly gauge of Industrial Production in Germany has fallen to 0.4%, below forecasts. This week the major data point that markets are awaiting is the release of the minutes from the European Central Bank’s December meeting, which has the potential for signs of rifts among policymakers. At the meeting, the ECB decided to expand the duration of the quantitative easing programme, however slowed the pace of monthly asset purchases. Mario Draghi avoided using the word “taper” in the press conference, but investors will be looking for any hint of “tapering” on this week’s minutes. Inflation is increasing slowly, but consistently, in the Eurozone, and the debate whether as to taper or not could have begun to be discussed last month. Today’s data showed the Sentix investor’s confidence index jumping to a 17-month high and the unemployment rate remaining steady at 9.8% in November.
  • USD.  The dollar is holding last Friday’s gains, which arose after the labour market report showed salaries rising to 2009 highs, along with higher participation rate. The labour market tightening was described by the Federal Reserve in its latest minutes as one of the main catalysts that could lead to higher interest rates, should it strengthen beyond current forecasts. The report supports the Fed’s expectations of three hikes this year. According to San Francisco’s Federal Reserve President, John Williams, the US does not need fiscal stimulus now that the labour market is at full employment, as the latest labour market report suggested. He backed current forecasts for three hikes this year, but argued that fiscal stimulus is not needed as opposed to better policies that support investment in the long-term health of the economy.
  • CAD.  The loonie consolidated gains last Friday, but is now under pressure as crude oil prices are retreating from a four day rally. Oil production disruptions are showing few signs of abating in Nigeria, where militants said they plan to resume attacks on facilities after the government declared it is not ready to negotiate, whereas in Libya guards are blocking the access to some fields. However, crude oil prices are falling as news emerged that US drilling activity has increased, which somewhat reduces the impact of the OPEC’s announced production cut. US drillers were increased to a total of 529 last week, the highest level since the beginning of January 2016, completing more than 100 new drillers since the end of September.

UK news

  • Pound slides to lowest level since October on May’s Brexit comment – FT The pound was the biggest faller on foreign exchange markets on Monday, sliding to its lowest level against the dollar since late October, after Theresa May warned there was no prospect of Britain keeping “bits of” EU membership. In an interview at the weekend, the UK prime minister told Sky News that “often people talk in terms as if we are leaving the EU but we still want to keep bits of membership of the EU. We’re leaving; we’re coming out.”
  • UK house price growth picks up speed again – Reuters Growth in British house prices picked up speed for the second month in a row in December, helped by a shortage of homes to buy, but price increases are likely to slow in 2017, mortgage lender Halifax said on Monday. House prices have risen more slowly since the shock decision by voters in a referendum last June to leave the European Union but surveys by Halifax and rival lender Nationwide have shown them holding up in late 2016.