Another interesting day on Wall Street saw the S&P500 initially open down more than 1% as investors reacted to the latest Brexit developments that were also roiling European markets. But as the session wore on the focus turned to matters closer to home – in particular, the prospects for a resolution of the current US-China trade dispute. There were more reports of US and Chinese officials ramping up talks ahead of the big Trump-Xi meeting scheduled to take place at the G-20 gathering in Argentina at the end of this month. And while Commerce Secretary Wilbur Ross expressed doubt that a deal would be struck quite so soon, his expectation that a deal would be achieved eventually helped progress the S&P500 to an eventual 1.1% gain, led in particular by a rebound in technology stocks. As a result, after falling 4bps to 3.08% when the equity market was on its lows, the US 10-year Treasury yield closed at 3.11%. The US dollar index was firmer, reflecting the weakness of sterling.
Against that background, markets have been mixed across Asia on Friday, with no local economic news of any note. The more constructive tone regarding the US-China trade dispute saw stocks in mainland China’s rise for a second day, with the CSI300 closing with a 0.5% gain. Meanwhile, a slightly firmer yen saw Japan’s TOPIX fall 0.6% following a very choppy session, thus closing at its lowest level since late October. Finance Minister Taro Aso spoke in favour of Japan granting entry to more foreign workers in order to address labour shortages, with PM Shinzo Abe aiming to admit around 345,000 people over a five-year period – less than the 500,000 that had been mooted. While sterling appears to have stabilised somewhat overnight (after falling almost 2% against the euro to below 1.13), further negative political news in the UK might well further weigh markets.
Of course, the main focus in the UK today will no doubt remain on politics. Following the terrible political reaction to the announcement of the draft Withdrawal Agreement text – including the resignation of several Cabinet ministers and reports that various Tory MPs had submitted letters of no confidence in Theresa May’s leadership to the 1922 Committee chairman – at a press conference yesterday evening May reaffirmed her commitment to delivering the best possible Brexit deal. Even if we do see enough letters (48) to trigger a no confidence vote, she might well win any vote within her party over the near term, allowing her to sign-off the deal at the special EU leaders’ summit scheduled on 25 November.
But the big challenge will be getting her deal through UK parliament – this deal has been met with condemnation from both sides of the Brexit argument and the ERG, a group of Tory Brexiteer MPs, the DUP and the Labour party have already implied that they will vote against the deal. However, there is little doubt that European leaders will later this month attempt to crush any hopes of any further meaningful negotiations, making clear that this is the best UK can expect. So with May’s deal essentially dead, the choice facing the UK will come down to heading for a no deal Brexit, which will not have the support of parliament, or, perhaps, look to put the decision back to a referendum, giving a choice between May’s deal or remain. So, expect financial markets volatility to remain through to year-end.
The dataflow today brings euro area final inflation figures for October. The final inflation data from Germany, France and Spain earlier this week brought no surprises, confirming the initial estimates of 2.4%Y/Y, 2.5%Y/Y and 2.3%Y/Y on the respective EU-harmonised measures. So, we expect the euro area figures to confirm the flash estimates showing headline CPI rising 0.1ppt to 2.2%Y/Y, a near-6-year high, and core CPI rising 0.2ppt to 1.1%Y/Y. In addition, ECB President Draghi will speak at a conference in Frankfurt.
In the US, the data focus will be October’s industrial production release, which is expected to show that output rose for the fifth consecutive month. The Kansas City Fed’s Manufacturing Activity Index for November, as well as capital inflows figures for September are also due for release.
New Zealand’s headline manufacturing PMI rose 1.6pts to a 5-month high of 53.5 in October. After falling below the critical 50 level last month, the production index rebounded 2.9pts to 52.8. Meanwhile, the new orders index rose 3.8pts to a 6-month high of 56.7 and the employment index rose 1.5pts to a 6-month high of 52.4. The improvement this month mirrors a recent improvement in measures of business confidence and suggests that the economy is continuing to expand at a decent pace.