There is a lot to squeeze into a shortened Thanksgiving week, starting with the latest flash PMI data in Europe and the US. The Thanksgiving holiday timing also means a double dose of UST supply today with $56bn US two-year and $57bn US 5-year auctioned in New York. The market will also be hoping for some clarity on Brexit and the future shape of the trading arrangement.
For November, Germany's flash PMIs fared much better than the French numbers. Covid lockdown restrictions weighed on the French PMIs for November, with both the manufacturing and services flash indicators weaker than expected. German business confidence in the outlook rose to its highest level in over two and a half years. Manufacturers benefitted from increasing export sales, although job losses in the sector continued—albeit at their slowest pace since June 2019. Despite weakness in services, firms added workers as they geared up to increase activity in the months to come.
Europe's overall mood to start the week has been very upbeat, with increasing hopes of a Brexit trade deal and some countries planning to ease Covid restrictions ahead of the holidays. At the same time, a rollout of Covid vaccines is also insight. However, it's hard to ignore that the EUR/USD is already trading near the upper end of its recent range, and interest—especially directional flow—has been subdued of late. Wait for a dip to buy, rather than chasing the pair near 1.19.
An Important Week For Brexit
Brexit negotiators are expected to wrap up their work this week and submit what they have to their leaders. Expect positive-sounding headlines of 'negotiations concluded' at some point this week. It will mean that while 99% or so of the legal text of the agreement stands, important 'brackets' will remain, i.e., key parts where no compromise has been found yet. It will then require UK PM Johnson and top EU leaders to take the final, most difficult decisions. That might not happen until well into December, and the European Parliament has started preparations to vote on a deal at the last possible moment on Dec. 28.
EUR/GBP has dropped below 0.89 ahead of the expected positive news on a Brexit deal. I would expect specs to take some profit off the table on their GBP/USD longs once the headlines about negotiations being concluded are out because they know this does not yet mean a deal is done. The question then will be whether still underinvested real money would start to buy sterling too, overpowering any profit-taking. I doubt that will happen right away, though, as rather than just negotiations being concluded on a technical level, most real-money investors would require a good political deal, which is unlikely before early or mid-December. There is also a strong possibility that by the time a contract is finally reached, the delicate nature of a minimal trade agreement will prevent a broader shift into UK assets - in which case, sterling might peak over the next couple of weeks.
Oil Gushes Higher
Crude oil prices stronger and holding above $45, propelled by encouraging vaccine rollout news and helped by a weaker USD index. Also helpful was a surprise drop in the oil rig count in the Baker Hughes survey on Friday. Traded volumes will be concentrated into the first half of this week given US Thanksgiving on Thursday, and the market appears to be anticipating a delay to the OPEC+ quota rise beyond Jan. 1, 2021, when the producers meet on Sunday/Monday, seeking to bridge a challenging northern hemisphere winter to the expected rollout of vaccines. So markets seem to be charging ahead, betting on the bullish trifecta of early vaccine rollouts, OPEC quota extension, and a weaker USD