A Sideways Market
UNCERTAINTY DRIVING STERLING SIDEWAYS
The coming week’s economic data calendar is busy in the UK, but lighter elsewhere PMIs, particularly for the UK and the Eurozone, will be watched closely as very timely indicators of current economic conditions. In September, both UK manufacturing and services PMIs slipped from very high levels in August, but stayed above well above the key 50 level consistent with economic expansion. We expect further slippage in October, but for both measures to stay above 50 and so signal continued growth. In the Eurozone, September saw a sharp fall in the services reading below 50, but a modest rise in manufacturing. We expect both to have fallen in October, taking the composite measure below 50 for the first time since June. Also of interest in the UK will be September retail sales. Retail activity is one area that has recovered sharply post lockdown, and overall activity is now back above its February level, although much of the activity continues to be online. There are question marks about whether consumers will continue to spend given uncertainties, but we look for another monthly rise this time of 0.7%. The latest CBI industrial survey will include the more detailed quarterly readings. Those are likely to show that businesses remain very reluctant to spend money and that investment intentions in particular are very weak. Other releases of note include September CPI inflation which is likely to post a modest rise as the Chancellor’s ‘eat out to help out’ scheme comes to an end. Finally, public sector finances for September are expected to show the deficit continues to rise at a rapid rate. The next BoE policy update less than 3 weeks away. So next week’s speeches from BoE Governor Bailey and other policymakers will be amongst the last opportunities for members to flag whether the MPC is likely to announce more stimulus measures in November, including raising the level of asset purchases. In the Eurozone, consumer confidence is predicted to show a small fall in October compared to September. In the US, the only releases are some September housing data, which are likely to show slower growth and the October PMIs. The latter usually do not get much attention, but we expect them to be consistent with modest economic growth. In China, Q3 GDP is expected to show the economy continuing to rebound as the Covid-19 situation there seemingly remains under control.
FURTHER RISES IN COVID-19 CASES AND RESTRICTIONS
The past week has seen more rises in Covid-19 cases. Record numbers have been posted in some European countries and the numbers seem to be on the rise again in the US, with some Midwest states reporting surges. In response, a number of European countries have introduced further restrictions including a nine-city curfew in France. In the UK, Northern Ireland has imposed a 2-week ‘circuit break’ from today, which includes closure of schools and hospitality venues. In England, a 3-tier regional system of controls was introduced on Monday. From midnight, London, Essex and York, among others, will be added to Tier 2 and Lancashire has been added to Tier 3. However, Greater Manchester is resisting being raised to Tier 3. The media is reporting the likelihood of further measures in the coming week. UK PM Johnson is under pressure to impose a ‘circuit break’ lockdown in England, or at least to move more regions to Tier 3. Ministers will be mulling over the potential economic repercussions of such a decision, balanced against the impact of a further significant rise in cases. This comes at a particularly difficult time as there are signs that the post-lockdown economic rebound is fading. Next Friday’s October PMIs will provide further timely information on this. Against this background, the mood in markets has been more ‘risk off’ this week. The majority of global equity markets seem set to end the week down. Meanwhile, the US dollar has appreciated against the euro and sterling, reflecting its perceived status as a safe haven. Today’s EU summit seems to be coming to an end with the EU and UK still unable to agree on their future relationship. UK PM Johnson had previously threatened to walk away from talks after the summit if a deal did not seem imminent. This morning he has said that the UK will now prepare for ‘no trade deal’. Talks may still continue next week, but even if they do it is unclear whether these will now be on the sticking points preventing an agreement or on preparations for a no-deal situation.
US ELECTION NOW JUST AROUND THE CORNER There is now less than three weeks to the US Presidential election. Democratic contender Biden remains a strong favourite to win, as nationwide polls give him a substantial lead. However, his lead remains narrower in key ‘swing’ states, which suggests the result may still be close. Indeed, markets may face a situation where the outcome is unclear on election night and for some days afterwards. Next week is supposed to see the last debate between the two candidates (early Friday UK time). This week’s second debate was cancelled because President Trump refused to take part in a ‘virtual’ event. Meanwhile, politicians in Washington continue talks over another fiscal stimulus package to offset the impact of Covid-19. This week, Treasury Secretary Mnuchin said that agreement is now unlikely before the election. However, neither side will want to give an electoral advantage to their opponents by seeming unwilling to talk. If a bill is not passed beforehand, it is likely to be a key priority for the next President. However, if that is Biden it may mean that the process is delayed until after his inauguration in late January.
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None of the information in this article is, nor should be construed as, financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.
