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European Outlook: Asian stock markets are broadly lower, with mainland Chinese bourses the notable exception. The Yen strengthened ahead of today’s U.S. jobs data, which weighed on exporters and the ongoing rise in oil prices failed to lift sentiment. the front end WTI future is now trading above USD 50 per barrel. U.S. stock futures are also down, but the FTSE 100 future is moving higher, underpinned by another slide in the pound, as France’s Holland reaffirmed the official EU stance, that access to the single market cannot be separated from the EU’s other key principles, including freedom of movement. So both sides are going into the official negotiations with a hard line stance and while part of this may be posturing it is clear that EU officials fear that abandoning the four key freedoms would set a dangerous precedent and could open the floodgates to a discussion on the general principles of the EU and fundamentally threaten the union, which will make any concessions to the U.K. difficult. U.S. jobs data will overshadow European data releases, which focus on production numbers from Germany, France and the U.K.

FX Update: The pound saw a dramatic dive and recovery during the early Asia session. There seems to be a degree of uncertainty about what the low was. Reuters reported a low of 1.1378 in Cable, since revised to 1.1491. The pair since recouped above 1.2450, which is still two big figures below levels seen at the New York close. The catalyst were remarks from France PM Hollande, who demanded that Britain suffer the consequences of leaving the EU, saying “it is not possible … to leave the EU and get the advantages without the obligations,” otherwise “we would jeopardise the fundamental principles of the EU.” Merkel, too, has this week indicated that the EU fundamental principles, including free movement of people, would be prioritized in upcoming Brexit negotiations. The pound’s outsized movement was greatly exacerbated by the sheer illiquidity of the sterling market in Asian hours. There is also talk of a “fat finger” trade amid the scramble of the interbank market to cover stop and options-related orders.

German industrial production jumped 2.5%  August. Much more than expected and even if the strong number is not a total surprise after much better than anticipated manufacturing orders numbers yesterday, and the rise in the Ifo, the data still restores confidence in the German recovery. Especially after the weak July numbers, when production fell back -1.5% m/m, which is more than compensated by the uptick in August. Capital goods production bounced back with a rise of 4.7% m/m, after falling -4.0% m/m in July and the data confirms that developments in the Eurozone mirror that in the U.K. albeit with a month delay as the initial dip on the Brexit referendum was followed by a strong rebound. As even the BoE highlighted though, one shouldn’t put too much faith in these numbers and already dismiss any negative impact from the Brexit scenario, as the long term fallout is still very unclear, especially as both sides are heading for tough divorce negotiations. In Germany at least the volatility over the summer was also due to the unusual constellation of holidays across the states.

ECB Ready to Taper? ECB tapering speculation has spooked markets this week and the panic reaction to a report that merely said officials are nearing consensus to phase out asset purchases gradually rather than letting the program end abruptly highlights the challenges Draghi and Co. face going ahead.  Later ECB’s Constancio is reported as saying that the ECB near taper consensus not correct, according to a MNI report, and QE will go on until inflation is back on track to its target. He said further than the council hasn’t discussed anything on QE.

 

Main Macro Events Today                

  • US Non-Farm Payroll – Consensus median expectations from Bloomberg and Reuters polls have new jobs at 172,000, Unemployment unchanged at 4.9% and earnings up to 2.5%.
  • UK GDP estimates  –  The National Institute of Economic and Social Research (NIESR) produce a monthly GDP prediction ahead of official government figures.  Last month it was 0.3%. Could be more significant today following the volatile moves in GBP and UK stock markets.

 

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Stuart Cowell

Market Analyst

HotForex

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