Politics are in the air

In with the old?

Politics are in the air as we kick off on Monday morning, this time the focus being firmly on Europe.

News that Merkel has declared that she will run for a fourth term as German Chancellor is offering some support to the recently battered Euro; to a degree this news had already been priced in, but a small relief rally is evident partly because there was no obvious successor. Had Merkel not stepped forward we could have seen the euro nose diving towards parity with the US dollar, if not beyond.

Merkel’s announcement also comes as former French President Nicholas Sarkozy’s come-back bid in France is over before it has even started, after he fell at the first hurdle, losing to Francois Fillon, a former Prime Minister, seen as a centrist, who declared that the dream of a Federal Europe is over. Should Fillon win the second-round next weekend, then he looks set to face leader of the far right National Front Party Marine Le Pen, who’s anti-Europe, anti-immigration stance has been gaining her support among French voters.

The Euro will continue to be the asset to watch here, as it acts as a good barometer of political domestic risk in the face of impending elections, which could see the emergence of an anti- EU majority- like what happened in the UK. Should more countries look as if they are heading to a divorce from the Eurozone then this would weaken the euro considerably.

Currently the euro is holding firm above $1.06 versus the dollar and with little in the way of economic data from the Eurozone, attention will instead turn towards ECB President Draghi’s speech later in the day.

Autumn Statement week

The Autumn Statement is set to be the main event this week and the markets will be paying particular attention to the amount of fiscal stimulus Chancellor Hammond is willing to spend. We are expecting to see an end to the years of austerity with the focusing shifting back to spending. Given that the Central bank has put any further stimulus action on hold, buyers of sterling will be looking for strong fiscal spending to boost the currency. However, given the size of the UK’s debt pile, in addition to poor economic forecasts any expectations of Trump style spending are misplaced and he is likely to opt for a rather conservative budget in comparison.

Sterling has seen a soft start to the week as Hammond’s talking down of the UK’s post Brexit economy over the weekend has done little to support the battered currency; we are expecting to see more volatility in the lead up to and during the course of the Statement on Wednesday.

Oil higher on expectation of an OPEC deal

Both Brent crude and US crude are trading higher, as comments from Iraq and Iran have once again fuelled hope that there will be an oil production cut agreement hammered together at the OPEC meeting on November 30.

The price of oil is remaining very sensitive to news flow, as it often has over the past two years as we draw closer to the OPEC meetings. Yet, investors are sufficiently weary not to get ahead of themselves, as has happened in the past and for that reason the upside appears to be limited even though there is more chance of a deal going through now than at any other meeting so far.

This is still not a done deal and although many of the countries involved are making the right noises we must not forget how challenging it will be to try to push a production cut deal through, with differing ambitions from the different parties involved. If no deal is reached we could expect oil to test $40 per barrel and should a deal get pushed through then $50 could be a reasonable target, with $60 or even $65 in sight over the medium term.

Interestingly, oil and the US dollar are usually negatively correlated, when the dollar rises the price of oil falls and we have finally seen this relationship turn positive thanks to other factors, such as Trump taking the Whitehouse and speculation surrounding OPEC production cuts.