• Crude, dollar and equities slip in holiday-shortened session

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    Early moves

    - US dollar slips along with crude - European equities turn lower There’s a softer tone across risk assets this morning following yesterday’s US Thanksgiving holiday. The dollar is weaker across the board. The Dollar Index is off around 0.5% after hitting a fresh multi-year intra-day high yesterday morning. This has helped to lift gold and silver in early trade. Crude oil is also weaker with both WTI and Brent pulling back from the $50 level. The two contracts have put in a strong rally over the last twelve days on hopes that OPEC members, together with Russia, will agree to production cuts at next week’s OPEC meeting. However, some doubts are creeping back in as it seems that Saudi Arabia is looking to block an exemption for Iran.

    Stock Index Update

    - ECB concerned over political uncertainty - Indices mixed in quiet holiday trade There was relatively little activity across European stock indices yesterday. Investors appeared unwilling to commit in the absence of leadership from US traders. This is unsurprising given how it is the rally in the dollar and US equity markets which have driven investor behaviour since the Presidential Election. Just this week we saw simultaneous record closing highs for the Dow, S&P, NASDAQ and Russell 2000. This broad-based rally unwound the sector rotation which was in evidence last week. Investors have gone from worrying about deflation and a low growth, low interest-rate world to expecting a pick-up in US inflation and growth on the basis of Trump’s election promises to cut taxes, tear up regulations and boost infrastructure spending. There’s also widespread relief that so far there’s been no further mention of trade tariffs. Yesterday the ECB released its biannual Financial Stability Review and warned that rising political uncertainty poses threats to banks, stability and economic growth. The ECB wasn’t just talking about Brexit or Trump’s election victory but also alluded to the Italian referendum on 4th December. Italian Prime minister Matteo Renzi needs to overhaul the constitution to drive through much-needed economic reforms and has said he will resign if the vote goes against him. The referendum comes just ahead of the year-end deadline for Italian bank Monte dei Paschi to raise €5 billion in capital (the bank has a market cap of €0.7 billion) and offload €28 billion in troubled loans. So far the risk is only priced in to Italian stocks. But if Renzi fails to win referendum, and Monte dei Paschi can’t sort itself out, then it won’t just be Italian banks that feel the pain, but whole European financial system.

    Commodities Update

    - Crude investors preparing for next week’s OPEC meeting - Gold and silver hover at multi-month lows Crude prices shuffled about in directionless trade yesterday. Trading volumes were light as US exchanges were closed for Thanksgiving. Overall, WTI and Brent are set for a second consecutive positive week having completely ignored the surging dollar. Instead, investors have focused on the hope that next Wednesday’s OPEC meeting will conclude with an agreement by all members to cut output by as much as 4.5%. It is also hoped that non-OPEC producers such as Russia will join in with the action in order to boost the oil price. As things stand, it appears that most of OPEC’s 14 members are falling in with plans for a cut. However, there is no evidence that any accommodation has been reached with Iran. The country is pushing for an exemption from any cut, yet Iran and Saudi Arabia still appear to be at loggerheads. In addition, International Energy Agency (IEA) Director Fatih Birol told Reuters that oil prices could come under downward pressure even if there is a cut as US shale oil producers would take advantage of higher prices to increase output. Gold and silver drifted lower yesterday in lacklustre trade. This followed on from Wednesday’s dramatic moves when both metals plunged as the US dollar soared. Yesterday the dollar slipped back on light volume as traders held their fire over the Thanksgiving holiday. However, few investors were brave enough to risk buying precious metals even as both gold and silver traded at multi-month lows. The problem is that investors feel that the dollar could rally further as expectations grow for a pick-up in US inflation. This suggests that the Fed is likely to tighten monetary policy at a faster rate than previously expected. Earlier this week the CME FedWatch tool indicated that the probability of a December rate hike was 100%. Technically, the next significant support levels come in around $1,180 for gold and $16 for silver. A break below either of these levels opens p the prospect of further declines.

    Forex Update

    - Dollar drifts in light trade - Chinese yuan hits eight-year low The US dollar drifted lower yesterday during a light volume session as US traders celebrated Thanksgiving. Earlier in the day the US Dollar Index hit its highest level since the first quarter of 2003. The EURUSD traded at its lowest level since March 2015 when it briefly broke below 1.0500 and the Chinese yuan hit an 8-year low. Yesterday morning the People’s Bank of China (PBOC) set the yuan midpoint against the dollar at 6.9085, the lowest level since June 2008. China allows the yuan to move within a 2 percent band around the daily fix. Back in August 2015 Chinese policymakers shocked the markets when they fixed the yuan 1.9% below the previous day’s fix. This was the biggest one day move in the currency in twenty years. But investors appear to have more confidence in the Chinese authorities these days. The current yuan decline against the dollar has been well-managed and steady. It’s also worth remembering that officially China now pegs the yuan to a basket of thirteen currencies with weightings based mainly on international trade, rather than just the US dollar. Since its inception at the end of last year this CFETS RMB Index has proved to be far steadier than the USDCNY pairing.

    Upcoming events

    Today’s key economic data releases include the first revision to third quarter UK GDP, along with UK Business Investment, Index of Services and CBI Realised Sales. From the US we have the Goods Trade Balance, Wholesale Inventories and Flash Services PMI.

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