Market Report.
🛠️ Yesterday we saw the release of manufacturing PMIs across multiple countries. China’s Caixin Manufacturing PMI fell below 50, dropping to 49.9 versus the 50.5 expected, signalling contraction.
🇪🇺 In Europe, Germany’s Manufacturing PMI fell to 48.2, and France’s to 47.8, both indicating contraction in activity. The exceptions were the two Mediterranean economies, Spain and Italy, which both remained above 50. The eurozone average came in at 49.6.
🇬🇧 The UK Manufacturing PMI also avoided contraction, printing at 50.2. In the United States, the Manufacturing PMI was also positive at 52.2, beating expectations. However, the US ISM Manufacturing PMI fell to 48.2, showing contraction. The discrepancy likely reflects differences in sampling or timing.
💸 Bitcoin and Ether fell sharply on Monday. The sell-off was attributed in part to a statement by the People’s Bank of China on Saturday warning of illegal activities relating to digital currencies, which put pressure on Hong Kong-listed shares of digital assets-related companies.
🎯 Main focus for Today: Eurozone inflation data and Fed Chair Powell’s speech
🏦 Economists at JPMorgan Chase & Co. now expect the Federal Reserve to cut interest rates next month, reversing their previous forecast that the central bank would delay reducing borrowing costs until January.
🗣️ The change in JPMorgan’s view is attributed to commentary from key Fed officials, notably the president of the Federal Reserve Bank of New York, John Williams, which has pushed the bank to reconsider its position. Wall Street’s largest bank had previously forecast a hold after the publication of the delayed September jobs report last week.
📉 JPMorgan now forecasts the Federal Open Market Committee, led by Chair Jerome Powell, will carry out two quarter-point rate cuts in December and January.
🇯🇵 Japanese government bond market is experiencing strong investor demand, despite the prospect of a near-term rate hike by the BOJ.
📈 Japan’s 10-year government bond auction on Tuesday saw stronger demand than the 12-month average, with a bid-to-cover ratio of 3.59 compared to the average of 3.20. This strong investor demand was seen despite rising expectations of a near-term rate hike by the Bank of Japan (BOJ), following comments from BOJ Governor Kazuo Ueda.
🔮 Swaps now imply about an 80% probability of a rate hike at the BOJ’s policy decision on December 19, with the odds rising to more than 90% for January. The benchmark 10-year yield has risen to its highest level since 2008, as investors are drawn to the elevated yield levels.
💴 The Ministry of Finance plans to raise short-term debt issuance to help fund the government’s economic package, adding ¥300 billion each to 2- and 5-year note issuance and ¥6.3 trillion to Treasury-bill supply.
🇬🇧 The market seems to be still worried about the UK government’s economic policies, despite the positive initial reception to Reeves’ budget.
📉 The budget was generally well-received, with the pound having its best week in three months and gilts gaining, as the fiscal outlook improved and gilt supply was reduced. Despite the reduced gilt issuance and improving deficit, the UK’s borrowing costs remain elevated compared to the US and France, a “moron premium” that should be tighter.
⚠️ The market appears to be mistrustful of Reeves and Prime Minister Keir Starmer, concerned that the budget was more about political positioning than sound economic policymaking. Measures like freezing tax thresholds and an employment rights bill that could increase employer costs are seen as anti-growth and not conducive to boosting tax revenues.
🛍️ Price inflation in British shops eased to 0.6% in November, down from 1% the previous month, as retailers rolled out Black Friday deals earlier than usual to attract shoppers. Shoppers ventured out on Black Friday, with footfall rising nearly 15% in British malls and around 13% on high streets from the previous week, though overall visits are still down 2% on last year.
Geopolitics.
🪨 As Europe embarks on a historic rearming effort, its defense companies are struggling to secure vital supplies of rare earth minerals, which are crucial for high-tech weapons components. US companies have been much quicker and more aggressive in securing rare earth supplies compared to their European counterparts, taking advantage of their financial might and supply chain expertise.
⚙️ European defense companies are facing dwindling rare earth stockpiles, with estimates suggesting production could be affected within months if the situation doesn’t improve.
🇺🇸 US companies are using their size and resources to secure rare earth supplies further upstream, obscuring portions of the supply chain as a hedge against potential Chinese export restrictions. In contrast, European defense companies are trying to buy rare earths directly without coordinating with suppliers, often lacking the necessary knowledge and expertise.
🇺🇦 The recent meeting in Miami between US and Ukrainian delegations did not include European participation, even though this is where the real deal-making is taking place. France and the UK are continuing to push for the deployment of NATO troops to Ukraine as part of a “coalition of the willing” to support the Zelensky government, despite this being unacceptable to Russia.
🛡️ UK Prime Minister Keir Starmer argued that a “multinational force” would be essential for ensuring Ukraine’s future security, while France’s Macron proposed troops could be deployed to the capital or western regions.
📜 However, the original US-drafted peace plan explicitly prohibited the deployment of NATO troops to Ukraine, and Russia has made it clear it would not tolerate such a move, as it was a key factor in its decision to launch the “special military operation.”
🔥 Europe’s counter-plan leaves open the possibility of NATO troop rotations, which the Kremlin has said would lead to direct war with the West.
🐉 UK Prime Minister Keir Starmer is seeking to strike a balance in the UK’s China policy.
🔍 Starmer said the UK needs a China policy that recognizes China’s influence in technology, trade and global governance, while also addressing the national security threat it poses. UK Prime Minister Keir Starmer said the UK will adopt a more pro-business approach to China, but will not trade its national security for greater trade ties.
🏛️ The UK is due to decide next week on whether to allow China to build a large embassy in London, which has faced cross-party pressure to block.
Market View.
🇺🇸 US markets remain indecisive. Mini S&P 500 futures have given back the modest gains made earlier, returning to around 6,822 points. Nasdaq 100 futures followed a similar pattern, retreating to 25,375 points.
💵 The DXY dollar index fell to 99 yesterday before rebounding to 99.42. This generated volatility in EUR/USD, which rose above 1.1650 before pulling back to the current 1.1612.
🇪🇺 In Europe, DAX 40 futures dropped to 23,461 yesterday before bouncing to 23,665. EuroStoxx 50 futures remain more stable, currently trading at 5,685.
🛢️ Crude oil appears to have calmed after the strong moves at the start of the week, with Brent trading at $63.22.
🥇 Gold futures reached $4,300 per ounce yesterday before cooling rapidly and are now at $4,245.
🪙 One of the main stories of the day was Bitcoin, which unfortunately suffered a steep decline, falling to $83,815 during yesterday’s session before rebounding to around $87,020.
