The pound extended gains on the back of a stronger-than-expected industrial and manufacturing production data. Industrial production rose by 1.6% on year to August, as the manufacturing production surged by 2.8% over the same period, versus 1.9% expected by analysts. Strong read underpinned the buy-side in the pound market.
It is worth keeping in mind that rising tensions at the heart of the Tories, heavy critics on PM Theresa May’s Brexit policies and chatter of a potential cabinet reshuffle could keep the topside appetite limited. Theresa May warned that the Brexit could result in a non-deal and asked businesses to be prepared for the worst. Intra-day resistance could be found at 1.3250 (200-hour moving average).
The FTSE 100 opened slightly upbeat in London. Bears are fighting back the bulls above the 7500p handle, as the selling pressure in pound appears to decline and may no longer provide a significant positive push to the FTSE stocks.
Catalonian President to speak at 6pm in Barcelona
It could be a make or break day for Catalonia. The Catalan government meets to discuss about an eventual separation from Spain. Catalonian President Carles Puigdemont will deliver a speech to lawmakers on the independence referendum. His choice of words is in focus. If Mr. Puigdemont softens his tone and takes a step back from the possibility of a unilateral declaration of independence, the Spanish stocks and bonds could rally on a temporary relief. On the other hand, a strong rhetoric from Catalonian President could escalate the political tensions and push investors away from the Spanish regional markets.
IBEX 35 (-0.38%) trades under pressure, financials are down by 0.70%.
Catalan risks are not being significantly priced in the euro and other European equity markets. The DAX (-0.04%) and the CAC (+0.04%) look stable before the moment of truth in Barcelona. It is a fact that an eventual rupture between Spain and Catalonia would increase the euro market risks, as it would rise anxiety beyond the Spanish borders. In this respect, France would be the next country on the chopping block, after having experienced tensions in Brittany and Corsica; the CAC 40 could suffer the side-effects of the Catalonian turmoil.
To us, the impact of the Catalonian crisis will likely remain regional in the foreseeable future and the low risk of spill-over should limit massive outflows from the single currency and other European markets. The Spanish stocks and sovereign bonds would clearly suffer the most in case of a Spain-Catalonia divorce, given that an undesired separation would raise critical questions, including the Eurozone giants’ will to share their currency with Catalonia, diplomatic relationships and trade partnership with Spain and the EU posterior to the separation and the reorganization of the European Central Bank’s (ECB) monetary policy in the light of a new political and economic configuration.
The latter stipulates that if the Catalan risks escalate further, traders could start pricing in a softer Quantitative Easing (QE) exit and smoother normalisation from the ECB. Such dovish shift in ECB expectations could then weigh on the single currency.
US equities set for a positive open
The US dollar is broadly softer before the US traders return from bank holiday today. The US stock indices are trading on a positive note: S&P500 futures (+2 pts) and Nasdaq futures (+7.5 points) and the Dow Jones futures (+28 points) edge higher. The Dow Jones could renew record at Tuesday's session.
Gold recovers on soft USD, Catalonian risks
Gold is benefiting from softer US dollar and the anxiety around the Catalan crisis. Some investors could opt for safe-haven allocations before Catalonian President’s speech due at 6pm in Barcelona today. The next natural target for long gold positions is $1’295/1’300 (50-day moving average / major 38.2% retrace on July – September rise).
Yen weakens
Japan’s trade surplus came in better-than-expected in August. The current account surplus unexpectedly rose from 2320.0 billion to 2380.4 billion yen. The USD/JPY held the ground above 112.50 in Tokyo despite the broad-based USD softening. Decent call options trail above the 113.00 mark at today’s expiry. The political uncertainties before Japan’s snap election are also encouraging for the JPY-bears.
Lira depreciation weighs on Turkish stocks
The Turkish lira remains vulnerable to the US-Turkey tensions. There hasn’t been a diplomatic solution yet. The lira pares the knee-jerk losses, yet the USD/TRY bias remains on the upside. The BIST 100 traded below the 100’000 mark for the first time in a month. The recovery is underway but filling the gap to the Friday’s close (104’000) could be difficult due to unnerved investors.
It is important to note that unlike the European stocks, there is a net positive correlation between the BIST and the lira due to Turkish companies’ high level of foreign currency debt. The 40-day correlation is above 60%, meaning that the soft lira is not encouraging for stock investors in Turkey.