Good morning,

USD: Give thanks for a pause

It is Thanksgiving in the United States today with the majority of market participants taking an extra day to make the holiday a long weekend. After the past six weeks or so, who can really blame them? Following Thanksgiving of course comes Black Friday and with it a chance for embattled retailers to make up for the rest of the year. To be honest, US retail should be doing well at the moment given the tax cuts and wage rises that have typified the consumption picture in the States for the past year or so.

While likely secure in the short term, the sustainability of such spending is doubtful to some for two reasons. The initial concern is about how long the boom in spending can be born out of this year’s tax cuts and whether additional cuts for the middle classes are also needed next year to keep the music playing. Such cuts may prove politically expedient but will continue to damage the longer term fiscal position of the US economy, especially given the inability of the Republican Party to follow through on its threats to get rid of Obamacare.

The second reason concerns tariffs and without a deal at the G20 meeting soon, tariff increases on goods that will directly drive consumer inflation higher could be a reality as soon as January. Tariffs are a tax on consumers not on producers – American shoppers will be paying the price, not the Chinese manufacturers.

For now, the dollar remains in its recent pose of benefiting from haven flows given recent weakness in global equity markets and should have a quiet day today unless something dramatic elsewhere kicks it into action.

GBP: Waxing and waning

The Ying and Yang of Brexit is that one week of absolute panic and sterling volatility must be followed by a week of relative calm and repose. Sterling has done very little since the open on Sunday evening – headlines are the key driver for the pound – and without any new news on the viability of the proposed deal, then investors are unlikely to want to get involved in sterling one way or the other.

A Times article yesterday suggested that Downing Street was relying on a substantially negative market move to focus political minds should the current deal be voted down in Parliament. All I will say on this is: be careful what you wish for. I can’t believe that this is actual policy but at least people n the corridors of power are cognisant of the effects that a defeat on the bill would cause to sentiment in sterling.

Theresa May was in Brussels yesterday in a bit to head off fears that the Spanish government may block a vote on the Brexit deal in Europe over the issue of Gibraltar. She will return to Brussels on Saturday ahead of a Brexit summit on Sunday. Should the EU sign off the deal then the next step in the process is a parliamentary vote. In the meantime, however, we expect sterling to hold its levels for now.

EUR: Rome rumbles on

Five members of the European Central Bank are due to comment later today on various facets of the Eurozone economy. With investors’ minds, however, there is really only one thing that matters and that is Italy.

The country was told yesterday that it might be “sleepwalking into instability” by the European Commission. This came after media reports that the Italian government was planning on cutting its proposed payments to pensioners and the young were dismissed by the ruling Lega party. The Italian budget issue will come to a conclusion soon but we really have to doubt whether the market turbulence that a lot of people are looking for will ever materialise.

Have a great day.