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I. Market focus
At the beginning of Monday’s session, the main topic in the global financial markets were reports that London and Brussels had made a secret deal, under which the UK would remain in the EU customs union after Brexit. This was reported by The Times, citing senior sources. It was also said that London was on course to secure an agreement on a “future economic partnership” (FEP) with Brussels that would allow Britain to keep open the prospect of a free trade deal resembling that enjoyed by Canada. Keeping the whole of the UK in the customs union with the EU will allow avoiding a hard border between Northern Ireland and the Irish Republic. This question was the key sticking point of the Brexit negotiations.
The optimism for orderly Brexit had a positive impact on the pound, which began a new week with growth. By the beginning of the European session, the British currency retreated somewhat from session highs, but the chances that it will continue growth remain high.
The main scheduled events of today's session will be the releases of the PMI for the UK’s services sector (09:30 GMT) and a similar report from ISM for the U.S. service sector (15:00 GMT). Attention should be also paid to the comments of the Bank of Canada’ (BoC) governor Stephen Poloz, who will speak at 13:10 GMT.
The stock market participants continue to assess the earnings reports of companies. Today, the focus will be on the results from HSBC Holdings plc (HSBC) and Ferrari N.V. (RACE), set to be published before the market opens.
II. The market highlights are:
Statistics Canada reported on Friday that the number of employed people rose by 11,200 m-o-m (+0.1 percent m-o-m) in October, missing economists’ forecast for a 12,700 increase and after an unrevised advance of 63,600 in the previous month. Meanwhile, Canada's unemployment rate declined by 0.1 percentage point m-o-m to 5.8 percent last month. That was the lowest jobless rate since July. Economists had forecast the reading to remain unchanged. According to the report, full-time employment increased by 33,900 (+0.2 percent m-o-m) in October, while part-time jobs fell by 22,600 (-0.6 percent m-o-m). In October, the number of private sector employees climbed 20,300 (+0.2 percent m-o-m), while the number of public sector employees declined by 30.800 (-0.8 percent m-o-m). At the same time, the number of self-employed rose by 21,800 m-o-m (+0.8 percent m-o-m) last month. Sector-wise, there were more people working in business, building and other support services (+2.9 percent m-o-m), wholesale and retail trade (+0.7 percent m-o-m) and health care and social assistance (+0.6 percent m-o-m). At the same time, employment decreased in "other services" (-2.1 percent m-o-m), finance, insurance, real estate, rental and leasing (-1.2 percent m-o-m) and natural resources (-2.1 percent m-o-m).
Another report from Statistics Canada showed that Canada’s merchandise trade deficit stood at CAD0.42 billion in September, narrowing from a revised CAD0.55 billion gap in August (originally a CAD0.53-billion deficit). Economists had expected a surplus of CAD0.15 billion. According to the report, the country’s exports edged down 0.21 percent m-o-m to CAD50.38 billion in September, primarily due to declines in exports of consumer goods (-3.9 percent m-o-m), which, however, were mostly offset by higher exports of energy products (+2.3 percent m-o-m). Meanwhile, imports decreased 0.4 percent m-o-m to CAD50.79 billion in September, with lower imports of aircraft and other transportation equipment and parts (-28.3 percent m-o-m) and energy products (-11.5 percent m-o-m) contributing the most to the drop.
The U.S. Commerce Department said on Friday the U.S. the goods and services trade deficit widened by 1.3 percent m-o-m (or $0.71 billion) to $54.02 billion in September from a revised $53.31 billion in August (originally a gap of $53.24 billion). That was the highest trade deficit since February. Economists had expected a deficit of $53.60 billion. According to the report, the September increase in the goods and services deficit reflected a gain in the goods deficit of 0.8 percent m-o-m (or $0.59 billion) to $77.23 billion and a drop in the services surplus of 0.5 percent m-o-m (or $0.12 billion) to $23.21 billion. September exports were $212.57 billion, up 1.5 percent m-o-m, while September imports stood at $266.58 billion, up 1.5 percent m-o-m. Year-to-date, the goods and services deficit surged 10.1 percent y-o-y (or $40.72 billion). Exports rose 8.2 percent y-o-y (or $143.79 billion), while imports boosted 8.6 percent y-o-y (or $184.50 billion).
The U.S. Labor Department announced on Friday that nonfarm payrolls increased by 250,000 in October after a downwardly revised 118,000 gain in the prior month (originally an increase of 134,000). According to the report, employment rose in health care (+46,700 jobs), in manufacturing (+32,000), in construction (+30,000), and in transportation and warehousing (+24,800). At the same time, the unemployment rate remained at 3.7 percent in October, which was the lowest rate since December of 1969. Economists had forecast 190,000 new jobs and the jobless rate to stay at 3.7 percent. The labor force participation rate increased by 0.2 percentage point m-o-m to 62.9 percent in October, while hourly earnings for private-sector workers rose by 0.2 percent m-o-m (5 cents) to $27.30, following a 0.3 percent m-o-m gain in September. Economists had forecast a 0.2 percent m-o-m advance in the average hourly earnings. The average workweek edged up by 0.1 hour to 34.5 hours in October, in-line with economists’ forecast.
The U.S. Commerce Department reported on Friday that the value of new factory orders increased 0.7 percent m-o-m in September, following a revised 2.6 percent m-o-m surge in August (originally a 2.3 percent m-o-m climb). Economists had forecast a 0.5 percent m-o-m advance. According to the report, orders for durable goods also rose by 0.7 percent m-o-m in September, driven by a gain in orders for transportation equipment (+1.9 percent m-o-m). Meanwhile, orders for non-durable goods increased by 0.6 percent m-o-m. Total factory orders excluding transportation, a volatile part of the overall reading, grew 0.4 percent m-o-m in September (the same pace as in August), while orders for nondefense capital goods excluding aircraft, a measure of business spending plans, fell 0.1 percent m-o-m (compared to a 0.2 percent m-o-m drop in August). The report also showed that shipments of core capital goods decreased 0.1 percent m-o-m in September, after declining 0.2 percent m-o-m in August. In y-o-y terms, factory orders grew 8.7 percent in September.
The weekly report from Baker Hughes, which was released on Friday, showed that the number of active U.S. rigs drilling for oil fell by one to 874 during the week ended November 2. In the prior week, the oil-rig count rose by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also decreased by one to 1,067, as the gas rig count was unchanged at 193 last week, and the miscellaneous rig count remained at 0. The U.S. rig count is up 169 rigs from this time last year when it stood at 898.
Markit/Caixin’s survey revealed on Monday that the activity growth in the Chinese services sector weakened to a 13-month low. The Caixin/Markit services purchasing managers' index (PMI) came in at 50.8 last month on a seasonally adjusted basis, down from the previous month's reading of 53.1. Economists’ had predicted the reading to edge down to 52.9. The 50 mark divides contraction and expansion. According to the survey, the new orders expanded the least since November 2008, indicating an obviously weakening demand for services. Despite the softer expansion in activity, staffing levels increased marginally at services companies during October, following a slight reduction in the preceding month. The amount of unfinished work at services firms decreased for the second month running in October, with some companies reporting greater efforts to clear backlogs. On the price front, the subindex for prices charged by service providers returned to positive territory, while the one for input costs declined, despite staying in positive territory, suggesting easing pressure on company profit margins. Caixin China Composite PMI, which covers both manufacturing and services, dropped to 50.5 in October from 52.1 in September, signaling that Chinese business activity expanded at weakest rate for 28 months in October.
III. Market Situation
The currency pair EUR/USD traded near the opening level, following a sharp drop on Friday, which was caused by a broad strengthening of the U.S. currency in response to favorable data on the U.S. labor market, as well as reports from the MNI news agency that the European Central Bank (ECB) is considering fresh Targeted longer-term refinancing operations (TLTROs). The Employment Situation report for October showed that U.S. jobs growth accelerated sharply last month, and wages recorded their largest annual gain in 9-1/2 years, pointing to further labor market tightening that could encourage the Fed to hike interest rates again in December. Today, investors will pay attention to the publication of the ISM’s report on business activity in the U.S. services sector. It is expected that services PMI fell to 59.3 points in October from 61.6 points in September. Resistance level - $1.1493 (high of October 23). Support level - $1.1301 (low of October 31).
The currency pair GBP/USD rose significantly, helped by The Times’ report that that London and Brussels had made a secret deal, under which the UK would remain in the EU customs union after Brexit. Keeping the whole of the UK in the customs union with the EU will allow avoiding a hard border between Northern Ireland and the Irish Republic. This question was the key sticking point of the Brexit negotiations. Market participants are also preparing for the release of the UK’s data on business activity in the services sector. According to economists’ forecast, the services PMI fell to 53.3 points in October from 53.9 points in September. Apart from the data, traders will also focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3131 (high of October 18). Support level - $1.2696 (low of October 30).
The currency pair AUD/USD traded slightly lower, weighed down by weak data from Australia and China. However, the further decline was limited by the broad weakening of the U.S. dollar. The Australian Industry Group (AiG) reported the Australian performance of services index (PSI) fell to 51.1 in October from 52.5 in September. Despite the decline, the index remains above the 50-point mark that separates expansion from contraction. Meanwhile, data from Markit/Caixin revealed that Chinese business activity expanded at the weakest rate for 28 months in October. Caixin China Composite PMI dropped to 50.5 in October from 52.1 in September. At the same time, the activity growth in Chinese services sector weakened to a 13-month low, with the Caixin services Purchasing Managers' Index (PMI) falling to 50.8 in October from 53.1 in September. Resistance level - AUD0.7258 (high of November 2). Support level - AUD0.7067 (low of October 31).
The currency pair USD/JPY rose slightly, approaching its high of October 31, partly due to the statements by the Bank of Japan’s (BoJ) governor Haruhiko Kuroda. He noted that the central bank was aware that prolonged ultra-loose monetary policy could squeeze the margins of financial institutions and potentially destabilize the country's banking system. Given weakened inflation and uncertainty surrounding overseas economies, however, Kuroda said the Bank needed to maintain its huge stimulus programme while keeping a watchful eye on the merits and costs of its policy. “The BoJ fully recognizes that, by continuing monetary easing, financial institutions' strength will be cumulatively affected," Kuroda said. Resistance level - Y114.09 (high of October 5). Support level - Y112.54 (low of October 2).
U.S. stock indexes closed lower on Friday, as Apple (AAP; -6.6%) dropped following a disappointing sales guidance for the holiday quarter. The forecast also dragged down shares of Apple’s U.S. suppliers, mostly chipmakers. The focus also was on the employment report for October, and the data on the U.S. trade balance and factory orders for September. The Labor Department announced that nonfarm payrolls increased by 250,000 in October after a downwardly revised 118,000 gain in the prior month (originally an increase of 134,000). At the same time, the unemployment rate remained at 3.7 percent in October, which was the lowest rate since December of 1969. Economists had forecast 190,000 new jobs and the jobless rate to stay at 3.7 percent. Meanwhile, the hourly earnings for private-sector workers rose by 0.2 percent m-o-m (5 cents) to $27.30, following a 0.3 percent m-o-m gain in September. Economists had forecast a 0.2 percent m-o-m advance in the average hourly earnings. The U.S. Commerce Department reported the U.S. the goods and services trade deficit widened by 1.3 percent m-o-m (or $0.71 billion) to $54.02 billion in September from a revised $53.31 billion in August (originally a gap of $53.24 billion). That was the highest trade deficit since February. Economists had expected a deficit of $53.60 billion. Another report from the Commerce Department revealed that the value of new factory orders increased 0.7 percent m-o-m in September, following a revised 2.6 percent m-o-m surge in August (originally a 2.3 percent m-o-m climb). Economists had forecast a 0.5 percent m-o-m advance.
Asian stock indexes closed lower on Monday, responding to negative signals from Wall Street and concerns about U.S.-China trade tensions, which reignited after White House economic adviser Larry Kudlow downplayed the potential for a quick deal with China.
European stock indexes are expected to trade mixed in the morning trading session.
Yields of US 10-year notes hold at 3.21% (+7 basis points)
Yields of German 10-year bonds hold at 0.44% (+1 basis points)
Yields of UK 10-year gilts hold at 1.36% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in December settled at $62.86 (-0.44%). The crude oil prices fell moderately as the U.S. sanctions against Iran's fuel exports came into force. At the same time, investors were awaiting final decisions of Donald Trump’s administration on waivers that will allow some countries to still import Iranian crude, at least temporarily. Investors also continued to digest the latest data from Baker Hughes, which showed that the number of active U.S. rigs drilling for oil fell by one to 874 during the week ended November 2. In the prior week, the oil-rig count rose by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also decreased by one to 1,067, as the gas rig count was unchanged at 193 last week, and the miscellaneous rig count remained at 0. The U.S. rig count is up 169 rigs from this time last year when it stood at 898.
Gold traded at $1,231.90 (-0.07%). Gold prices fell slightly, despite the weakening of the U.S. currency. The gold prices continued to be pressured by strong employment data in the U.S., which pointed to further labor market tightening that could encourage the Fed to hike interest rates again in December. Gold is sensitive to higher interest rates which can cause a rise in bond yields, making non-yielding bullion less attractive to investors, and could strengthen the dollar, making the precious metal more expensive for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
Sentix Investor Confidence
Purchasing Manager Index Services
BOC Gov Stephen Poloz Speaks
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