GBP Currency Gets A Lift From A Non-Binding ECJ Opinion On Article 50

Notes/Observations

• European Court of justice (ECJ) advisers in a non-binding decision stated that the UK could pull Article 50 unilaterally (Insight: Ruling theoretically meant Britain could cancel Brexit negotiations and stay in EU without asking any of other Member States)
• UK Nov Construction PMI beats expectations for its 8th month of expansion (53.4 v 52.5e)
• South Africa moves out of recession as Q3 GDP handily beats expectations

Asia:

• RBA left the Cash Rate Target unchanged at 1.50% unchanged (as expected) for its : 24th straight pause in the current easing cycle: Reiterated stance that low rates were supporting the economy; progress on unemployment and inflation to be gradual; Saw GDP growth averaging ~3.5% over the coming years

Europe:

• Italy budget deficit of 2% said to be not low enough for EU Commission
• Italy PM Conte: NOT working on budget with a deficit below 2% (Note: earlier reports circulated that Italy PM Conte was preparing for 2019 budget deficit between 1.9-2.0%)
• Eurogroup to support EU commission view on Italy’s budget; Eurozone Govts to recommend Italy to comply with fiscal rules
• EU Official stated that Germany abandoned its ambitious plans for EU digital tax; would present draft plan to impose a 3% tax on revenues generated by ad sales in the digital economy
• UK Parliamentary Speaker stated that there was arguable case that UK govt committed contempt of parliament over motion for Brexit legal advice

Americas:

• Fed Chair Powell made some unscheduled comments from Yellen award which affirmed call for patience on further rate hikes, economy could shift mid-2019; Productivity picked up but not clear if trend was sustained
• Fed’s Kaplan (dove, non-voter): currently focused on not being pre-determined about future rate path. Highly possible US economy looked very differently by mid-2019; wanted to be patient and see how things unfolded
• White House econ adviser Kudlow: cautiously optimistic about reaching US-China deal; Clarifies 90-day timetable for completing US-China trade talks begins Jan 1st (implies deadline for trade deal will be Apr 1st). Did not have a specific agreement on China auto tariffs but expect auto tariffs to drop to zero upon agreement

Energy:

• OPEC key members reportedly determined to agree on new output deal despite Qatar’s withdrawal from the group

Macro

• (UK) United Kingdom: A non-binding opinion from the Advocate General of the EU Court of Justice concluded that the U.K. should be allowed to reverse its Article 50 notice. U.K. government officials had asked the court to delay a ruling so as not to interfere with the internal decision making, while EU officials actually would prefer the court to rule against the ability of countries to unilaterally reverse Article 50 notices once they have triggered, arguing that this could open the exit procedure to the risk of abuse by government’s trying to exert political pressure. The court ruling is still outstanding, but while there is no legal obligation to follow the assessment of the legal opinion, it usually does. It opens up a whole can of worms. If a member state can invoke article 50 then simply withdraw it unilaterally then Italy (and every other disgruntled member) what is stopping them using it as a threat to extract better terms?
• (IT) Italy: Eurogroup Finance Ministers yesterday issued a statement on public finances that identify the “urgent need to rebuild fiscal buffers, notably in Member States that have not reached their Medium-Term Budget Objectives. It also backs that Commission’s assessment that Italy’s budget draft constitutes a “particularly serious non-compliance” with the fiscal rules and recommends “Italy to take the necessary measures to be compliant with the SGP (Stability and Growth Pact”. Italian press reports this morning suggest that both sides aim to come to an agreement by December 19, with Italian officials reportedly open to cut the deficit target to 2%, which is still likely to be an overshoot of the government’s projections that are obviously based on vastly optimistic growth assumptions.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.41% at 359.70, FTSE -0.44% at 7,031.79, DAX -0.71% at 11,384.51, CAC-40 -0.66% at 5,020.71, IBEX-35 -0.74% at 9,109.00, FTSE MIB -0.41% at 19,541.50, SMI -0.22% at 9,084.50, S&P 500 Futures -0.48%]
• Market Focal Points/Key Themes: European Indices trade lower across the board fading some of the sharp trade related gains seen yesterday, following declines in Asia and lower US Index futures. Macro developments in Italy and the UK continue to take dominate headlines. On the corporate front European Automakers are fading some of the gains seen yesterday aided by underwhelming US car sales data for November. On the earnings front, Ferguson trades lower on profit taking after Q1 results with IG Group, Zumtobel, Elior, Bpost, Consort Medical and SAS among other names falling after earnings and trading updates. Neopost and Quartix were among the risers after earnings. In other news Cicor Group trades higher after project awards while Kier Group continues its fall out falling a further 10% following its surprise rights issue announced on Friday. In the US, Toll Brothers reported strong Q4 results. Looking ahead notable earners include HD Supply, Dollar General, Autozone and Movado among others.

Equities

• Consumer discretionary: Ryanair [RYA.UK] +1% (agreement with union; load factor), Wizz Air Holdings [WIZZ.UK] -4% (load factor), Ferguson [FERG.UK] -3% (earnings), Elior [ELIOR.FR] -6% (earnings; affirms outlook)
• Consumer staples: Ite Group [ITE.UK] +0.5% (earnings)
• Financials: IG Group [IGG.UK] -2% (trading update)
• Healthcare: Consort Medical [CSRT.UK] -22% (earnings), Celyad [CYAD.BE] -8% (trial update)
• Industrials: Daimler [DAI.DE] -2%, BMW [BMW.DE] -2%, Volkswagen [VOW3.DE] -2.5%, Porsche [PAH3.DE] -2% (Nov car registrations statistics; U.S. cars retail sales), SAS AB [SAS.SE] -6% (earnings), Neopost [NEO.FR] +8% (earnings), bpost [BPOST.BE] -20% (earnings; cautious outlook)
• Technology: Cicor Group [CICN.CH] +10% (projects awarded), Quartix Holdings [QTX.UK] +6.5% (trading update)

Speakers

• Eurogroup Finance ministers commented following meeting
• Eurogroup chief Centeno: had delivered a comprehensive plan to strengthen the Euro. Ministers agreed to keep working on a deposit insurance scheme and report progress in Jun 2019. Euro Area to introduce single LIMB CACS by 2022. Italy should take measures to comply with EU rules. Greece needed to make more progress in areas EU’s Moscovici: EU was awaiting more details to evaluate concrete and credible steps by Italy on its 2019 budget. Italy proposals were going in the right direction. Eurogroup supported Greece’s decision not to cut pensions in coming years
• France Fin Min: More work was needed to make a Euro Zone budget a reality but budget text was a substantial step
• BOE Gov Carney Treasury select Committee testimony noted that the Brexit scenarios laidout were not what was likely to happen. His takeaway from Brexit analysis was that the banking sector was prepared. Would be uncomfortable not having some flexibility to ensure UK Financial sector is appropriately regulated after Brexit
• BOE Dep Gov Broadbent Treasury select Committee testimony stated that food prices would move higher in a no-deal Brexit scenario due to weaker GBP currency and other factors
• European Court of justice (ECJ) advisers: UK could pull Article 50 unilaterally (non-binding decision). Final ruling would come at a later date (Non-binding opinion which required full ruling from judges)
• Germany Fin Min Scholz: Have made significant progress in negotiations on Euro Zone reforms
• Italy PM Conte stated that deficit reduction was possible of money recovered
• Italy junior Econ Min stated that PM Conte would find convergence with EU over 2019 budget but noted limited margins for negotiations
• Sweden Central Bank (Riksbank) Jansson: Repo Rate could probably be cut slightly lower than -0.50% in an economic downturn. Policy rates now not as effective tool as they once were. Might become necessary to modify monetary policy framework with 2% inflation target that most central banks currently apply. Too early to say whether the 1st potential rate hike would occur in either Dec or Feb
• China reportedly issued a memo to step up punishment of IP violations
• OPEC could delay a decision on production cut if Russia did not agree to a substantial cut in its production (**Reminder: in recent talks Russia had indicated it wants to cut by a maximum of 150K bpd, while Saudi Arabia wanted a more even distribution of the production cuts)

Currencies/Fixed Income

• USD maintained some soft footing as Treasury yields continued to decline and easing trade tensions.
• EUR/USD edging back towards the 1.14 area as US Treasury yields tested 2.95% for a three-month low. Market participants continued to speculate that the Fed would slow the pace of its rate hike. The dollar was also impacted by the temporary truce in the US-China trade conflict as money flowed into riskier currencies versus the safe-haven greenback. The difference in yield between the US 2-year and 10-year tightened to its smallest since July 2007.The 3-5 year curve has already inverted
• GBP was firmer after a European Court of justice (ECJ) adviser stated in a non-binding opinion that the UK could pull its Article 50 unilaterally. Ruling theoretically mean Britain could cancel Brexit negotiations and stay in EU without asking any of other Member Statest

Economic Data

• (BR) Brazil Nov FIPE (Sao Paulo) CPI: 0.2% v 0.2%e
• (FR) France Oct YTD Budget Balance: -€87.0B v -€87.1B prior
• (CZ) Czech Q3 Average Real Monthly Wage Y/Y: 6.0% v 5.8%e
• (ES) Spain Nov Net Unemployment M/M: -1.8K v +52.2K prior
• (CH) Swiss Nov CPI M/M: -0.3% v -0.1%e; Y/Y: 0.9% v 1.0%e; CPI Core Y/Y: 0.2% v 0.4% prior
• (CH) Swiss Nov EU Harmonized CPI M/M: -0.4% v -0.1%e; Y/Y: 1.0% v 1.1%e
• (SE) Sweden Q3 Current Account (SEK): 38.6B v 4.0B prior
• (NO) Norway Nov Region Output Survey (Past 3-months): 1.39 v 1.35 prior; Output Survey (Next 6-Months): 1.49 v 1.46 prior
• (UK) Nov Construction PMI: 53.4 v 52.5e
• (ZA) South Africa Q3 GDP Annualized Q/Q: 2.2% v 1.9%e; Y/Y: 1.1% v 0.5%e
• (EU) Euro Zone Oct PPI M/M: 0.8% v 0.5%e; Y/Y: 4.9% v 4.5%e
• (GR) Greece Q3 Final GDP Q/Q: 1.0%% v 0.4%e; Y/Y: 2.4% v 1.8% prelim

Fixed Income Issuance

• Spain Debt Agency (Tesoro) sold total €4.09B vs. €3.5-4.5B indicated range in 6-month and 12-month Bills
• (ZA) South Africa sold total ZAR2.85B vs. ZAR2.85B in 2026, 2032 and 2048 bonds
• (CH) Switzerland sold CHF464.9M in 3-month Bills; Avg Yield:-1.018% v -0.987% prior

Looking Ahead

• 05.30 (UK) Weekly John Lewis LFL sales data
• 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO)
• 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills
• 05:30 (BE) Belgium Debt Agency (BDA) to sell Bills
• 05:30 (UK) DMO to sell £2.5B in 1.0% Apr 2024 Gilt
• 06:00 (BR) Brazil Oct Industrial Production M/M: +1.1%e v -1.8% prior; Y/Y: +2.1%e v -2.0% prior
• 06:30 (TR) Turkey Nov Effective Exchange Rate (REER): No est v 69.03 prior
• 06:30 (EU) ESM to sell €2.0B in 3-month bills
• 06:45 (US) Daily Libor Fixing
• 07:45 (US) Weekly Chain Store Sales
• 08:00 (RU) Russia announces weekly OFZ bond auction (held on Wed)
• 08:10 (UK) Baltic Dry Bulk Index
• 08:30 (CA) Canada Q3 Labor Productivity Q/Q: 0.2%e v 0.7% prior
• 08:45 (EU) EU Commission on member draft budgets
• 08:55 (US) Weekly Redbook Retail Sales data
• 09:00 (MX) Mexico Oct Leading Indicators M/M: No est v 0.11 prior
• 09:00 (MX) Mexico Nov Vehicle Domestic Sales: No est v 115.4K prior
• 09:00 (EU) Weekly ECB Forex Reserves
• 09:30 (NZ) Fonterra Global Dairy Trade Auction: Dairy Trade price index: No est v -3.5% prior
• 10:00 (MX) Mexico weekly International Reserves data
• 10:00 (US) Fed’s Williams (moderate, voter)
• 10:30 (SE) Sweden Central Bank (Riksbank) Dep Gov Skingsley
• 11:00 (DK) Denmark Nov Foreign Reserves (ISK): No est v 467.6B prior
• 11:00 (NZ) New Zealand Nov QV House Prices Y/Y: No est v 5.4% prior
• 11:30 (US) Treasury to sell 8-Week Bills
• 11:30 (US) Treasury to sell 4-week and 52-week bills
• 13:00 (UK) BOE’s Vlieghe – 14:00 (AR) Argentina Oct Industrial Production Y/Y: No est v -11.5% prior; Construction Activity Y/Y: No est v -4.2% prior
• 16:00 (CL) Chile Central Bank (BCCh) Interest Rate Decision: expected to leave Overnight Rate Target unchanged at 2.75%
• 16:30 (US) Weekly API Oil Inventory data