Sterling spike shatters the gloom

Summary

Sparse news and earnings flow in Europe concentrates minds on the year’s corrosive drivers of risk appetite.

A day for giving back

It appears participants are coming to the same assessment we arrived at during Wednesday’s better-looking session. That it was a worthwhile consolidation of the month’s direction so far—lower in the U.S. and Europe, higher in Asia/Pacific regions including China, but not Japan—but not worth chasing. There’s no escaping the orbit of Wall Street, it seems, even on Thanksgiving Day. Investors there sold-up before shutting down, ceding much ground won beforehand. The second half of the Thursday’s session in the southern half duly shows markets on course to return much or all of Wednesday’s gains.

Oil struggles

Unfounded oil hopes are one driver. Official data showed storage was up 4.9 million barrels to the highest since December 2017, contradicting an earlier industry reading. On a fundamental basis, this means assessments of Brent should point back towards Tuesday’s $61.71 11-month low. The December contract was almost a dollar above the morning’s $62.27 low just now, but short of Wednesday night’s $64.47 high. In turn, that peak was buyers’ best effort since the tumble from $66.80 to $61.70 earlier in the week.

Oil’s takeaway for stocks

The read over to oil shares is clear enough. The heavyweight Oil & Gas index was second-hardest faller among STOXX sectors for much of the session. Not all market interpretations will be negative if price weakness persists. For instance, softer oil can drag inflation, and in turn monetary policy. Another is the potential simulative effect that U.S. President Donald Trump alluded to an overnight tweet. Cheaper oil is “Like a big Tax Cut for America and the World”, he said. For the moment though, the key takeaway is just that. Without the contribution over the last session from a more optimistic take for oil majors, a stock market prop is removed. Again, markets could require resumed input from Wall Street, particularly its technology sector, to shift the mood on.

PMIs and Canada CPI in focus

There are few macroeconomic releases scheduled for the rest of the week that could be strong catalysts. PMIs are due across Europe and the States on Friday. They could add nuance to currencies but there are clearly bigger fish to fry. Similar can be said about a Canadian inflation print that is expected to reverse some of September’s 0.4% fall. A 0.1% rise in October would keep the annualised rate unchanged at 2.2% but would not be enough to shift the dial on a likely BoC rate hike. Baked in expectations have prevented the U.S. dollar from rising above C$1.335 since June.

No breakthrough

This leaves few priorities for participants outside of Brexit, till late Friday at least. Perhaps this is one reason why sterling has been more active than truly warranted. A 121-pip cable spike was almost erased in short order before the pair steadied. A 76-pip move against the euro was similarly volatile. They followed UK and EU agreement on a draft declaration. It was not a breakthrough as such. A draft agreement was the likely outcome once informally achieved earlier in the month and the content has not changed. Still, now is a sensible juncture at which to realise profits on shorts. There is only a slim chance that the main ‘internal’ threat to the agreement, from Spain, will amount to much at this weekend’s summit. Hence December’s parliamentary vote—probably a fortnight away—is still the bigger risk for the deal.

Sterling can drift higher as volatility falls

Short- and long-term implied volatility in the options market (which shows how hard prices could whipsaw) points to demand easing from last week’s 21-month highs. Even though the need for sterling protection remains at the highest since October 2016, softening vol. could be sterling-supportive. Sterling against the dollar and euro are back within their ‘Brexit deal range’ at last check, but no worse. Real fireworks are being kept in reserve for December.