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Gilts, sterling shrug off Spending Review
Not a lot ultimately to get markets too excited, in fact markets took the Spending Review in their stride. Gilt markets shrugged off the Chancellor’s set-piece despite a massive splurge in borrowing that produced some heady numbers that really we have never seen before in this country – it’s fair to say the bond vigilantes are conspicuous by their absence these days.
The UK is forecast to borrow a total of £394bn this year, which is equivalent to 19% of GDP and a record amount. No mention of the inevitable tax raid that is coming…but it is undoubtedly is coming. The Bank of England has foursquare got the government’s back these days (not quite outright financing but as good as) and the global bond market is so squashed by central banks that these eyewatering borrowing numbers can be shrugged off by the market.
UK 2-year gilts were down at -0.039% and 10-year yields at 0.307%. Yields are actually lower on the day, which is probably due lack of momentum today in the reflation trade (n.b. pro-cyclical equity rotation without reflation has been killer for gold but as per prev. notes the inflation will start to show in CPI prints in US and lead gold higher), and the curve remains negative out to four years with real rates still deeply negative.
GBPUSD moved a little lower to 1.3340 area but bounced on this support and the pair remains well off the day’s lows. US data crossing showing higher-than-expected initial and continuing jobless claims whipped the cross back to 1.3360 at the bottom of the hour before coming down. US durable goods were strong at +1.3% vs 1% expected, with core durable goods at 1.3% vs 0.5% expected.
The package unearths some very substantial near-term problems for the UK economy. The economy will contract by 11.3% this year and growth next year has been slashed to just 5.5% from 8.7% expected in July. Economic output will not return to pre-pandemic levels until the end of 2022. Unemployment will rise to 7.5% in Q2 2021 – it’s always darkest before the dawn. Vaccines emerging in the second half of next year will start to see this trend reverse, it is hoped.
Elsewhere ahead of the US open the Dow is set to open 40-50pts lower at a whisker under 30,000. FTSE 100 also steady at -0.6% just under 6,400.
Chart: GBPUSD not fussed much
Week Ahead: Brexit courtroom drama, US inflation and euro area PMIs
Welcome to your guide to the week ahead in the markets. This week, Brexit is inescapable and Euro data comes in.
UK Supreme Court ruling
One thing is certain – the Brexit comedy/tragedy will continue this week following the drama of the Supreme Court. Boris Johnson will find out this week whether his decision to suspend Parliament was legal. Meanwhile rumours of the chances of a ‘deal’ between the UK and EU will no doubt do the rounds.
Sterling will remain exposed to headline risk and be more volatile than peers, although until there is real clarity, GBP pairs may lack direction over the coming days.
US PCE inflation
The Fed is relaxed about the uplift in the core CPI readings, which jumped to 2.4% last time out. On Friday markets will be focused on the Fed’s preferred inflation gauge – core PCE.
While announcing a quarter point cut to rates last week, FOMC members left their inflation expectations for this year and next unchanged. If the PCE gauge follows the CPI indicator, there may be some concern that inflation is rising faster than policymakers are forecasting.
Following the ECB interest rate cut, markets are shifting to eco data to show whether there’s any sign of uplift in the Eurozone economy. Flash manufacturing and services PMIs are due Monday, while the German Ifo business climate report is released on Tuesday.
Reserve Bank of New Zealand governor Orr has said the central bank is in wait and see mode as it assesses the impact of cuts this year. Markets don’t expect any change to the main cash rate on Wednesday, but recent GDP slowing does suggest the RBNZ will maintain its easing bias and accommodative stance.
Keep these dates in your diary, as results come out for Manchester United, Nike and more.
|Sept 23rd||Cintas||Q1 2020|
|Sept 23rd||Manchester United||Q4|
|Sept 24th||Nike||Q1 2020|
Coming Up on XRay
It’s a busy week on XRay, make sure you don’t miss out on these live video sessions. Tune in live, or watch on catch-up when it suits you.
|07.15 GMT||Sept 23rd||European Morning Call|
|17.00 GMT||Sept 23rd||Blonde Markets|
|15.45 GMT||Sept 24th||Asset of the Day: Oil Outlook|
|19.00 GMT||Sept 25th||Asset of the Day: Indices Insights|
|18.00 GMT||Sept 26th||The Stop Hunter’s Guide to Technical Analyis (Part 4)|
Key Economic Events
Lots of US and Euro data out this week, so expect to see some reaction in the currency markets.
|07.15-08.00 GMT||Sept 23rd||Eurozone Flash PMIs|
|13.45 GMT||Sept 23rd||US Flash Manufacturing PMI|
|08.00 GMT||Sept 24th||German IFO Business Climate|
|14.00 GMT||Sept 24th||US CB Consumer Confidence|
|02.00 GMT||Sept 25th||RBNZ Official Cash Rate and Statement|
|14.30 GMT||Sept 25th||US Crude Oil Inventories|
|12.30 GMT||Sept 26th||US Final GDP|
|12.30 GMT||Sept 27th||US PCE Inflation, Core Durable Goods|