- U.S. calendar has manufacturing ISM, construction spending, auto sales
- Canada calendar focuses on Q3 GDP, expected to rebound 48.0%
- Dollar and yen softer, Kiwi dollar hit 1-yr high vs yen, amid risk-on positioning
- European stock markets have rallied after a strong close in Asia
- UK final Nov manufacturing PMI revised up, to 55.6 from 55.2, up from 53.7 in Oct
- German Nov unemployment rate unexpectedly dropped to 6.1% from 6.2%
- Eurozone final Nov manufacturing PMI revised up to 53.8 from 53.6
- RBA left policy settings unchanged, as widely expected
- China manufacturing PMI rose to 54.9 in November from 53.6
- Japan Nov manufacturing PMI at highest level since Aug 2019
North American Open
Treasury Outlook (December 1)
It was a November to remember for Wall Street as the S&P 500 and Russell 2000 recorded their best November ever, climbing 10.75% and 18.29%, respectively. The Dow rallied 11.84% on the month for its strongest November since 1928, while the NASDAQ was up 11.8% for its best since 2001. Positive vaccine news provided a lot of the underpinning, but the ongoing Fed accommodation also supported. For the year-to-date, however, the NASDAQ has been the big winner with a 35.96% surge thanks to the strength in the stay-home shares. The S&P 500 is up a very respectable 12.1%, while the Dow is in positive territory with a 3.86% increase as the vaccine developments provide hope for a return to normalcy sooner than later. Treasuries were little changed with the long bond closing at 1.570% and the 10-year at 0.844%, while the 2-year was at 0.147%, well off of the cheapest levels on the month.
The calendar heats up and will be heavy for the rest of the week, concluding with the November jobs report. Today’s slate has the November manufacturing ISM, expected to slip to 57.5 from 59.3. October construction spending should rise 0.8% from 0.3% previously. November auto sales will trickle out through the session. For Fedspeak, the focus will be on testimony from Fed Chair Powell on the CARES Act. In his prepared remarks released Monday afternoon he will say that vaccine news is very positive for the medium term, but warned there are still significant challenges and uncertainties, including the timing, production, distribution, and efficacy across different groups. He also noted that the economic improvement has moderated and the outlook remains “extraordinarily uncertain.” Other Fedspeakers include Brainard, Williams and Daly are on deck. The earnings calendar features Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp.
Canadian Market Outlook (December 1)
Canada’s GDP expected to rebound 48.0% in Q3 after -38.7% Q2 plunge
A busy calendar is on tap in Canada this week, contrasting with the nearly blank docket last week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shotfall in September. The Q3 productivity report (Wednesday) is also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to “normal” next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year — something the BoC is likely to monitory closely.
FX Update (December 1)
EUR-USD has settled lower after yesterday posted a three-month high at 1.2004. Strong Chinese manufacturing PMI data — as in best-in-10-years strong — catalysed a resumption in risk-on positioning in global markets, which saw the dollar, along with the yen, come under pressure, with the effect of lifting EUR-USD form its correction low at 1.1924. EUR-USD’s 30-month peak seen in early September is at 1.2012. Market participants will be mindful that the pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. There aren’t many strong prevailing reasons to bullish on the euro, too, given recession bound eurozone nations, which are underperforming the U.S. and Asian economies, strong dovish bias at the ECB, the 750 bln euro EU recovery fund being delayed by a dispute with Poland and Hungary. One positive has been the recent outperformance of European stock markets relative to global peers. We still anticipate the euro gaining versus the dollar and yen while underperforming against more cyclical currencies, which hinges onrisk appetite holding up in the months ahead. This seems reasonable, given optimism for a vaccine-facilitated return to economic normality in 2021, or something approaching it, alongside massive liquidity from world central banks and prospects of more fiscal stimulus in major economies. Negative real interest rates in the U.S. and the Fed’s codified lower-for-longer policy rubric are considerations, along with the U.S. deficits and capital seeking higher returns in buoyant global markets.
The pound came under pressure after Cable traded above 1.3400 for the first time in three months. A high was left at 1.3406 before the pair dropped quite sharply. The correction low so far is 1.3342. The high was a reflection of broader dollar weakness, while the drop has been a reflection of broader pound weakness. These dynamics come with market participants continuing to wait for a concrete development from the EU and UK future relationship negotiations. Just last week today, December 1, was being touted as the deadline, though now the latest deadline is reportedly this Saturday, while there have been reports that the European parliament could convene as late as December 28 to ratify a trade deal. Germany’s Merkel has been putting the pressure on EU states to reach a deal with the UK. Fishing remains a key sticking point, though France’s insistence that the current arrangement remains in place, which gives the UK only 18% of the catch from its own waters, is seen as unreasonable by the UK, naturally, but also many other EU states. Pressure on the UK government is intense. Brexit ideologues in PM Johnson’s party are demanding that no quarter is given to the EU, while a leaked Whitehall document last week warned of a “perfect storm” of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland — which is what could happen in a no deal. What is clear, deal or no deal, is that EU and UK’s relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing.
USD-CAD has dropped back under 1.2950, pulling lower from yesterday’s rebound high at 1.3010, which was seen after the pair posted a 26-month low at 1.2922. The oil market will remain the dominant driver of USD-CAD, and we remain bullish of both oil and the Canadian dollar. Oil prices are up today after ebbing moderately over the previous few days. Strong Chinese manufacturing data boosted oil and other resource commodities. The OPEC+ group deferred a decision on output quotas until Thursday. The consensus expectation is for the group to refrain from rising output quotas for at least another three months from January, while a six-month extension is also being considered, which by its own analysis would likely swing the oil market back into supply deficit. Global stockpiles are high and demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. At the same time OPEC output has increased, with Libyan production having fully returned to pre-blockade levels. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a higher prevalence of working from home than before, reducing demand for fuel and enabling consumers of gasoline to reduce commuting days during times of oil high prices. These are motivating reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. Consumers have built up savings and there is potential for a significant acceleration in global economic activity by mid next year. USD-CAD has been trending lower since March, and we anticipate there is more to come.
USD-JPY edged out a five-day high at 104.46 before ebbing back to the lower 104.00s. Both the dollar and yen weakened amid a rekindling in risk appetite following strong manufacturing data out of China. Yen crosses lifted, though have remained off recent trend highs for the most part. One exception was NZD-JPY, which pegged a one-year peak. Regarding USD-JPY specifically, both currencies are viewed as safe haven, counter-cyclical currencies, which limits the direction scope for the pairing, though the real interest rate differential between the U.S. and Japan is a mathematical negative for the nominal exchange rate. Outside the case against the dollar, the yen is amid what we are tagging as a longer-term softening trend, especially against the cyclical currencies, including the dollar bloc. The yen’s broader performance should continue to derive from the level of risk appetite in global markets. Japan’s surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.
To learn more about Mark Coe visit his profile here .