Market Review – Fundamental Perspective 20 November 2017

Most risk markets came under pressure mid last week but had largely recovered by Friday thanks in part to the US House and the Senate Finance Committee approving their respective versions of a tax cut package
EUR has opened this week lower against G10 peers after German coalition talks collapsed over the weekend as a result of the FDP withdrawing from negotiations due to irreconcilable differences on immigration and environmental policy.
Many had anticipated Merkel to continue in charge for another four years but due to the collapse of the ‘Jamaica’ coalition, she now faces the options of setting up a minority government, trying to form a coalition with the SPD or asking President Steinmeier to order another national election.
In the UK, Chancellor Philip Hammond will release the 2018 Budget on Wednesday and Barclays Research sees the risks to GBP as skewed to the downside as “…the OBR is likely to lower its GDP growth forecasts based on an assumption of slower productivity growth over the next four years…”.
GBPUSD remains within its recent 1.3000-1.3340 range while EURGBP support comes in at 0.8790 and 0.8730 with resistance at 0.8955 and 0.9050.
US Congress is on recess this week for the Thanksgiving break so developments on the tax front in the Senate are likely to be out of focus until next week.
A final vote in the Senate is expected by mid-December and it is expected to be a close call given the relatively smaller Republican majority in the Senate versus the House.
Looking to the week ahead, with many US participants out of the office, the prospect of thin trading is high. Fed and ECB minutes from their most recent meetings released later this week are likely to provide minimal new information and are unlikely to impact markets much.
In Emerging Markets, Moody’s and S&P will release their sovereign debt review of South Africa on Friday which is likely to cause a spike in volatility. A downgrade could result in a large amount of passive SA bond selling and weigh on ZAR.

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