Normal service was resumed for U.S. markets yesterday after the pause of recent days, as we saw more record highs with the Dow, S&P 500, Nasdaq and Russell 2000 all closing at record levels. With Black Friday and Cyber Monday approaching investors appear to be loading up on tech and retail stocks in anticipation of a bonanza this weekend.
European markets also shrugged off the political intrigue unfolding in Germany, with German carmakers helping drive the DAX up for the second day in succession, while in Asia this morning the Hang Seng hit the 30k level for the first time in 10 years, a rise year to date so far of more than 35%.
It’s fair to say that while a lot of attention is expected to be on the UK Autumn Budget today at 1230GMT it is highly unlikely to produce any surprises. Aside from the fact that any long term planning is likely to be problematic at best until we know what any final EU divorce bill is likely to be, the public finances still remain in a fairly precarious state.
UK national debt may not be up to the £2trn mark yet but it’s not too far off, and while the annual deficit for this year is expected to come in well below the Chancellors target of £58bn the government still has fairly limited room for manoeuvre.
That being said, despite yesterdays higher than expected October deficit of £8bn, the higher than expected number was offset by a similar downward revision to the September number, the UK economy still remains in better shape than all of the dire predictions that accompanied last year’s Brexit referendum.
The Chancellor’s plans will undoubtedly be dictated by the fact that the Office for Budget Responsibility will have to downgrade its outlook for the UK economy from the figures we saw in March, where it estimated that the UK economy would see 2% GDP growth this year. This is likely to see a downgrade to about 1.5%,
Against that backdrop and calls for greater investment in public services the Chancellor will have to navigate a tricky path in maintaining the confidence of markets that the government will still seek to do what is responsible, against the need to support the economy.
As it is he has already had to extend his target for balancing the books into the next decade, and may well have to extend that deadline further.
Some measures we could see is the lifting of the public sector pay cap for certain workers, as well as measures to support the housing market and in particular first time buyers. Other measures could be tweaks to business rates as well as changes to pension tax relief.
We could also see new pollution taxes on diesel cars and changes to the way VAT is levied on small businesses, but anyone looking to see a big and bold budget will do well not to hold their breath if history is any guide.
Sadly this government appears to be a prisoner of its circumstances and lacks the imagination or capacity to do anything other than to tinker around the edges.
Once the budget has been dissected the markets are likely to pore over the latest Fed minutes with most investors expecting to see further confirmation that the US central bank remains on course to raise interest rates next month.
It has become apparent in recent weeks that some on the Fed board are concerned about the pace of future rate rises into 2018 given that inflation still looks fairly benign on the official numbers. Some of the survey data paints a somewhat different picture so it will be interesting to see if that particular anomaly is noted.
In reality it is likely to be difficult to glean too much more than that from these minutes given that of the main permanent board members left next year, only Jerome Powell and Lael Brainard will be left in situ. There are still 4 open vacancies left to fill to bring the quota up to 7, with Randal Quarles already appointed by President Trump as vice chair of supervision.
How any new members will potentially affect Fed policy next year is going to be particularly tricky and should not be underestimated? While regional Fed Presidents get to vote on a rotational basis the permanent Fed governors get a vote at every meeting. Their views on monetary policy are going to be important and carry a lot of weight.
EURUSD – the 1.1710 area continues to support but while below 1.1820 the risk is for a move towards 1.1650 as well as the November lows. A move above this week’s peak argues for a return to the October peaks just below 1.1880.
GBPUSD – continues to trade close to its two week highs at 1.3280, with main resistance at the 1.3320 area, which means there is a risk we could see the pound slip back towards the 1.3150 area. Only a move below 1.3120 opens up the prospect of a retest of the range lows at 1.3030. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – continues to slip back as it looks to close in on the 0.8820 level. We could see a test of major support near the November lows at 0.8735. We need to see a move back above the 0.8940 level to argue for a return to the 0.9000 area.
USDJPY – appears to have found a short term base near the 111.80 level just above the 200 day MA, but we need to see a move back through the 113.20 area to argue for a return to the recent range highs above 114.00.
FTSE100 is expected to open 3 points higher at 7,414
DAX is expected to open 10 points higher at 13,177
CAC40 is expected to open unchanged at 5,366
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