1, All Eyes on US Services PMI as British Data Disappoints
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European stocks are broadly higher so far today, despite a mixed bag of economic numbers from the continent, while US futures are slightly higher before the open as well. The Eurozone Services PMI has been revised higher, to 51.2 today, which helped sentiment following a long string of negative releases, but the British Services PMI came in well below expected, while the Italian measure showed contraction, similarly to the Manufacturing survey from the vulnerable country.
Eurozone Retail Sales also missed the consensus estimate by a hair, so the softening of the economic data remains clear, and despite today’s rally in Europe, US stocks continue to be in much better shape, with the Nasdaq hovering near its two-month high, despite Google parent Alphabet’s (GOOG) pre-market dip. The company reported earnings yesterday in after-hours trading, and although it delivered positive surprises both in sales and earnings, investors got worried due to an unexpected increase in costs, which threaten margins.
Active trading is expected in the morning session on Wall Street, with the ISM Non-Manufacturing PMI coming out just after the open. Analysts expect a slight drop to 57.0 in the measure following last month’s big negative surprise, but barring an outsized plunge, the gap between the US and the European and Chinese outlook will remain wide.
2, FTSE 100 Rallies But Pound Slips as New Brexit Compromise Surfaces
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Although it’s still unclear if and when the European Union would reopen the negotiations following the rejection of the original plan by the House, an encouraging development could bring a final deal closer. Former Brexit minister Steve Baker drafted a new plan, called the Malthouse compromise after the housing minister who initiated the talks between the spilt Tory fractions.
The promised new backstop would avoid a hard Irish border through a free trade agreement, with a longer transition period to agree on the final terms (by the end of 2021). While the plan needs the approval of the government and of course the EU, we think that if the leaders of the Union would face the choice a new, somewhat changed deal and a hard Brexit, the outcome would be quite clear.
The Pound which has rallied on the possibility of an extended deadline remained weak in the wake of the new plan, with the GBP/USD pair slipping below 1.30 for the first time in two weeks, but British equities gathered some relative strength today, despite the weak economic numbers, boosted by the rally in the mining segment.
3, President Trump to Deliver State of the Union Speech
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President will evaluate the first half of his first (?) term tonight following the longest government shutdown in history, and the issue of the border Wall will likely take center stage. The President’s approval rating took a hit due to the shutdown, and it will interesting to see what strategy he will choose, with the declaration of a national emergency still being on the table.
Besides immigration, he will likely address the legislative deadlock in the Congress, and his stance on the Democratic House could be an important tell for the next two years and the campaign, which already started in Washington.
The issue of drug prices and the changes in foreign policy could also be important for markets, and Donald Trump wouldn’t be Donald Trump if he wouldn’t surprise us with something outrageous to reshape the political narrative. Should he announce plans that would add to the already ballooning deficit, the USD might get under pressure again, despite its multi-day bounce that followed the post-Fed sell-off in the currency.
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