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Focus shifts to Europe this week

US futures look a little flat ahead of what is likely to be a very quiet day on Wall Street as the country observes the Veterans Day bank holiday.

This week as a whole could see less focus on the US as developments on Brexit and the Italian budget take centre stage. The UK could be in for a bumpy ride as divisions between the two side grow while Italy is having frustrations of its own with Brussels, as it tries to convince the European Commission to allow it to run a 2.4% deficit next year. Rome has until tomorrow to resubmit its draft budget after which an excessive deficit procedure could be opened against it and sanctions applied if it doesn’t comply.

This is only likely to fuel the growing populism in Italy so is something Brussels would surely rather avoid but with Rome currently refusing to shift from its 2.4% deficit target for 2019, something is going to have to give. There have been reports that Italy is willing to compromise on its ambitious growth forecasts in order to appease the EC but it’s unlikely this will be enough so further battles are likely to ensue, putting heavy pressure on Italian debt.

Oil rebound tested as traders cast doubt on 2019 output cut

Oil prices are paring their early gains on Monday as the rally that followed some bullish reports over the weekend quickly fades. Oil bears may well have seen the weekend headlines as an opportunity to top up positions, with the OPEC+ meeting at the start of December being of far more significance. As of yet, there doesn’t seem to be much of a consensus on whether the market is as oversupplied as recent data suggests, despite the JMMC reporting so over the weekend and indicating that further cuts will be necessary.

There is clearly appetite for action in Saudi Arabia which has committed to cutting output by half a million barrels next month but that isn’t yet shared by Russia, the other prominent member of the OPEC+ group. With the US, Russia and Saudi Arabia currently pumping at or near record levels and the Iranian sanctions not restricting output nearly as much as expected, due to the eight American waivers that were granted, traders may well see scope for further downside ahead of the meeting. To add to the bearish case, the outcome of the meeting is not as inevitable as some have been in the past.

Pound under significant pressure on latest Brexit setback

The pound is taking a bit of a beating at the start of the week, as Brexit negotiations once again stall on the Irish border solution and reports emerge of more resignations following that of Jo Johnson on Friday. Just as it looked as though we were closing in on a deal, we’ve taken another step backwards with differences remaining on the backstop and how the exit can be triggered. With neither side showing a willingness to budge, this could be a huge hurdle to the deal that a fudge may struggle to resolve.

I think people are genuinely concerned that this could be a deal breaker because even if Theresa May offers yet another concession, the chances of it passing through parliament are slim as it just feeds into the narrative that we’d be left in the backstop indefinitely. The pound clearly reflects this view this morning having slipped more than 1% against the dollar to trade around 1.2850. Further downside could be on the cards in the coming days if a fudge for this impasse isn’t found, with 1.27 potentially being a big level below..

Selloff in European majors, led by Sterling, intensify in European session today. It now looks like Brexit negotiation has not just stalled, but regressed. UK Prime Minister Theresa May's spokesman James Slack said the Cabinet has backed May in Brexit and expects them to continue to do so. But apparently, May is starting to lose support even from the remain camp in her party. May is moving backward.

Euro is not far behind with EUR/USD taken out 1.13 key support firmly. EUR/JPY also broke 128.60 near term support. Italian Prime Minister office denied that there would be a cabinet meeting on budget today. Deputy Prime Minister Luigi Di Maio continued with populist rhetoric and said respecting EU budget limit is suicidal. We'll see what revised plan they're going to re-submit to the European Commission tomorrow.

For now, Canadian Dollar is trading as the strongest one for today. But that's firstly because it's digesting last week's broad based loss. Secondly, Canada is not at the center of any storm for now. Third, WTI crude oil recovers today on Saudi Arabia's export cut and is back above 60. Dollar is the second strongest, followed by Yen and both are showing promising technical developments.

In other markets, major European indices are soft today. At the time of writing:

• FTSE is flat
• DAX is down -0.70%
• CAC is down -0.16%
• German 10 year yield is down -0.0198, at 0.389, back below 0.4
• Italian 10 year yield is up 0.034 at 3.432. That is, spread with German is back above 300

Earlier in Asia:

• Nikkei rose 0.09% to 22269.88
• Hong Kong HSI rose 0.12% to 25633.18
• China Shanghai SSE rose 1.22% to 2630.52. But that's seen mainly as gap covering.
• Singapore Strait Times dropped -0.32% to 3068.15

Theresa May suffered a new hindrance and her chances of obtaining government support for a Brexit deal have become thinner.

European futures are trading mix and set to kick off this week with a little hope. Investors are digesting the set back over Brexit which took place over the weekend. Theresa May suffered a new hindrance and her chances of obtaining government support for a Brexit deal have become thinner.

Theresa May really needs to decide if she is going to ditch her plans over Brexit or just leave the seat for a person who can perform the damage control more efficiently. Possibly, this is the last chance for the prime minister to corral her divided cabinet if she is serious about delivering the deal in November. Sadly, the majority of another run of 2016 referendum over Brexit still doesn't exist in the parliament and the businesses and investment banks have to create their own safety net.

Financial institutions are reacting to the changing environment in the U.K. U.S investment banks are in a process of reducing their operational exposure in the UK and planning to shift the operations of about 250 billion euros of the balance sheet to a more stable place such as Frankfurt.

London's reputation is at stake, this is not a small move. If London wants to keep its reputation as a hub for financial services, the government really needs to put the right person for this job or just throw in the towel and forget the idea of Brexit. No one wants to see or say that the best days for London are in the past. London is the most unique city in the world and under no circumstances, the city should suffer the consequence of a politicians' decision just like how the currency is suffering. If the banks continue to move their operation out of London, then the optimistic forecast for real GDP for the coming years may just look like a fool paradise.

In terms of currencies, the dollar index is the dominant story and the index is maintaining its strong presence against the G10 currencies. The dominance of the dollar index can easily be seen against the Euro and sterling. The Euro/dollar pair has dropped below the critical level of 1.13 which sends the most bearish signal and the sterling-dollar has also slipped below the 1.29 and this opens the door towards the 1.27.

Having said this, most of the euro weakness in the euro is also down with the fact that the concerns over Italy have taken over.

Having said this, most of the euro weakness in the euro is also down to the fact that concerns over Italy have taken over.

Oil was massively oversold in the past few weeks however the price has enterted in a major support area.

Fundamental Analysis

Oil has firmly entered in a bear territory and the recent comments from the Saudi oil minister may actually support the market. The minister has said that Saudi Arabia sees need to cut 1mb/d from October level. We are seeing investors taking advantage of the overselling of the oil price in the recent weeks and a corrective move is strongly on the card. The current momentum could push the oil price towards the 62.50 and a break of this would open the floor towards the next resistance of 63.20.

Technical Analysis

In terms of technical analysis, the below intraday (4 hours) chart for Brent shows that we have a clear downward trend. This is because the price is trading below the downward trend line and as long as the price remains below this trend line, there will be no hope for the bulls.

In terms of volatility, the price did pierce the lower line of the Bollinger band and now it has moved above the 20-day moving average (shown in blue ). Having said this, the price is trading within the Bollinger band, this gives us the confirmation that the volatility isn’t hitting its high notes.

The current upward move in the price may be challenged by the 50-day moving average (shown in yellow) and then you have the 100-day moving average (shown in green).

The RSI has also bounced from its extreme oversold zone and this confirms that the current upward move is backed by some momentum.

The support zone is shown by the green horizontal line
The resistance zone is shown by the red horizontal line

The euro has tumbled to its weakest trading level against the US dollar since June 2017 during the European trading session, after breaking below the bullish double-bottom pattern, at 1.1300. Heavy downside pressure is expected to stay on the EURUSD pair while price trades below the 1.1300 level, as medium-term traders continue to exit long positions. EURUSD sellers will likely target the 1.1178 support level, while buyers need to close the daily candle above the former yearly trading low.

The EURUSD pair is strongly bearish while trading below the 1.1300 level, key technical support is now found at the 1.1225 and 1.1178 levels.

If the EURUSD pair moves above the 1.1280 level, key resistance is found at the 1.1300 and 1.1330 levels.

The greenback has climbed to a fresh monthly trading high against the Japanese yen currency, although buyers have so far failed to perform a higher time frame price close above the 114.00 level. If we see a move towards the 114.54 level, the chances increase that an inverted head and shoulders pattern will start to form. Overall, the USDJPY pair is intraday bullish while trading above the 113.81 level and continues to create bullish higher highs as illustrated in the four-hour time frame chart below.

The USDJPY pair is bullish while trading above the 113.79 level, key technical resistance is now found at the 114.19 and 114.54 levels.

If the USDJPY pair trades below the 113.79 level, sellers may target the 113.60 and 113.37 support levels.

WTI oil price bounced on Monday after hitting new multi-month low at $59.25 last Friday, as news that Saudi Arabia will reduce its output in December by 500,000 barrels per day.

The announcement on output cut due to seasonal lower demand, but also signs that lower production may extend into 2019, boosted oil price to $61.27 on Monday.

Bounce was so far unable to hold gains and more significantly dent larger bears (WTI was down 11.5% in Oct fell further nearly 7% in the first week of Nov), driven by very strong bearish sentiment on strong global supply and minor impact from US sanctions on Iran which started last week.

Overextended daily studies warn of corrective action but lacking stronger signals for now and keeping bearish bias intact.

Repeated close below psychological $60 handle would add to negative outlook for test of strong supports at $58.38 (100WMA) and $58.06 (09 Feb trough).

On the other side, stronger bullish signal could be expected on recovery extension through falling 10SMA ($62.45), as sustained break here would sideline bears for stronger corrective action.

Res: 61.00, 61.27, 62.45, 63.17
Sup: 60.00, 59.25, 59.02, 58.38

Notes/Observations

• Opposition to UK PM Brexit plan mounting; May trying to find a final compromise in her Cabinet to unlock the negotiations with the EU

Asia:

• Japan PM Abe stated that wanted more fiscal stimulus to support the economy; wanted to boost H12019 spending
• China Premier Li Keqiang reiterated committed to opening up domestic economy

Europe:

• Italy Fin Min Tria said to be looking to lower budget growth forecasts for 2019 to 1.0-1.2% (currently 1.5%) in order to reach deal with EU Commission on fiscal policy

Brexit:

• UK PM May said to have been forced to cancel plans for emergency cabinet meeting on Monday to approve a Brexit deal - UK Press
• Andrea Leadsom (Commons Leader) said to reject key part of Brexit plan. Warned the proposal – giving the EU a joint say over when the UK could break free of the Irish border "backstop" – would be thrown out by parliament
• PM urged her cabinet to accept they must abandon hopes of a unilateral power to end the backstop and push for a joint review mechanism with Brussels
• Four UK ministers who support remaining in the EU are said to be close to quitting PM May's government; arrangement agreed to
• UK and EU negotiators were said to be working on a mechanism to review in July 2020 whether the backstop would need to be activated
• EU officials said to reject PM May's plan for an independent mechanism to oversee how Britain leaves a temp Customs Union

Americas:

• US VP Pence to speak with Japan PM Abe about trade agreement during visit

Energy:

• OPEC President Barkindo stated that there would be no new increase in OPEC+ production, could be output cuts
• Saudi Oil Min Al-Falih stated that was premature for OPEC to discuss production cuts, OPEC to cut supply only if surplus reached in 2019
• Saudi Arabia said to propose OPEC and non-OPEC producers to cut production by up to 1M bpd
• Russia Oil Min Novak stated that 'in theory' open to crude production cuts if OPEC+ reached consensus, needed a little more time to assess oil market
• OPEC is likely to agree to an oil production cut when it meets in Dec after Saudis confirmed they would cut its own oil supplies next month and Russia signaled it could follow suit

Macro

• (IT) Italy - ECB's Guindos issued a renewed warning on Italian debt: "as regards public finances, Italy is the most prominent case at the moment in light of the overall debt level and the political tensions around the Italian government's budget plans. The strong market reactions to political events have triggered renewed concerns about the sovereign bank nexus in parts of Europe". De Guindos said that while "contagion has been limited so far, it remains a possibility", adding that "this underpins the call for fiscal discipline and for observing and applying fiscal rules in Europe".
• (UK) United Kingdom - The decisions of Brois Johsnon's brother Joe to quit over the government's Brexit plan generated a media frenzy in the UK as it showed how unfeasible May's plan is to both side's of the divide. (Joe Johnson is a Remainer). There are also reports that Prime Minister May cancelled a cabinet meeting that was scheduled for today. The news raises concerns for a disorderly no-deal Brexit scenario.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 -0.4% at 364.4, FTSE +0.2% at 7116, DAX -0.8% at 11441, CAC-40 -0.3% at 5093, IBEX-35 0% at 9136, FTSE MIB -0.4% at 19138, SMI -0.5% at 9033, S&P 500 Futures -0.1%]
• Market Focal Points/Key Themes: European Indices trade mixed this morning, with notable weakness in the Dax, following on from weakness in Wall Street on Friday and gains in Asia. Brexit uncertainty continue to weigh on Cable, with weakness helping the FTSE outperform. Market volumes were on the lighter side due to Veterans day Bank Holiday in the US. On the corporate front, earnings continued to to underwhelm; Infineon declining over 3% as a weak outlook puts pressure on the stock. Dignity also underperforms after a decline in profits. SAP trades lower after announcing the $8B acquisition of Qualtrics; Tobacco names among notable decliners with BATS down over 8%, after the FDA proposed a ban on menthol cigarettes. Looking ahead notable earners include Aecom, Kamada and Autohome.

Equities

• Consumer discretionary: Dignity [DTY.UK] -3.5% (earnings), Flughafen Zuerich [FHZN.CH] -8% (FOCA's proposals), TomTom [TOM2.NL] +4.5% (said to receive takeover bids), Gama Aviation [GMAA.UK] +8% (Chairman to retire)
• Consumer staples: British American Tobacco PLC [BATS.UK] -8%, Imperial Brands [IMB.UK] -3% (FDA proposal to ban menthol cigarettes), Carr's Group [CARR.UK] +3% (earnings)
• Financials: Euronext [ENX.FR] -2% (earnings)
• Healthcare: AstraZeneca Plc [AZN.UK] +2% (FDA approval, positive study results), Shire Plc [SHP.UK] +3% (Takeda comments on acquisition)
• Industrials: Leonardo [LDO.IT] +1.5% (awarded contact; Italy's govt defense spending cut)
• Technology: SAP AG [SAP.DE] -4% (to acquire Qualtrics for $8B in cash), Infineon [IFX.DE] -5% (earnings; div raise), Playtech [PTEC.UK] +0.5% (trading update), SimCorp [SIM.DK] -9% (earnings)

Speakers

• BOE's Broadbent stated that saw signs of weaker growth in Q4. Domestic consumption had remain resilient. Right to believe that outcome of Brexit could change the outlook for UK materially. Saw signs of domestic inflation pressure at this time; wage growth is materially higher. 'Limited and gradual' was not a precise number of hikes and important to reassure people that BOE would not engage in a very steep series of rate hikes. Transition period was most crucial for BOE outlook and reiterated MPC view that rates could either move higher or lower on Brexit outcome
• ECB's De Guindos (Spain) stated that needed more ambitious approach to systemic risk; contagion from Italy remained a possibility. Observing re-emerging debt sustainability concerns in Europe
• German Fin Min Scholz stated that he supported the French model on digital tax; sought EU digital tax deal in Dec at EU Finance Minister meeting. Wanted to agree on reforms this year including further development of ESM into a European Monetary Fund
• France Fin Min Le Maire: There will be decisions to strengthen Euro Zone on Dec 4th. Size of planned Euro Zone budget initially not a priority
• EU Brexit Negotiator Barnier: Told EU27 ministers that a Brexit deal has not been reached yet but efforts continue. Some key issues remained under discussions , in particular a solution to avoid a heard border between Ireland and Northern Ireland
• EU official: Have yet to set a date for EU Leader Summit; need more clarity from UK before fixing a summit date
• Labour party spokesperson (opposition): If we vote down PM May's Brexit deal than would seek a general election. If no general election then all options would be on the table - including a 2nd referendum
• Belgium Foreign Min Reynders: No Brexit Leader summit if there was no progress; still waiting to hear from London and preparing for all possibilities on Brexit
• Israel Central Bank (BOI) said to announce the end of its forex purchasing program to offset natural gas production. To purchase FX if foreign exchange fluctuations are not in-line with fundamentals
• China PBoC' advisor Ma Jun: Pressure on CNY currency (Yuan) could ease if fed eases off the pace of its rate hikes
• Saudi Oil Min Al-Falih reiterated view to maintain long-term market balance; OPEC+ would do what it takes to balance market - including production cuts. Technical analysis showed the need to reduce supply by 1M bpd from Oct levels

Currencies/Fixed Income

• USD maintained its firm tone in the aftermath of last Friday's US PPI data U.S. producer prices rose more than forecast in October for the biggest jump in six years. Data reinforced market view that the Fed would keep rising rates in December and likely each quarter in 2019
• Opposition to UK PM Brexit plan mounting saw the GBP broadly weaker. PM May's ambition was to have a full draft withdrawal text ready early this week but the decision may be postponed further, as May's proposal was under fire. GBP/USD was lower by 1% to test below 1.2845 ahead of the US morning. 10-year gilts lower by over 5bps on Brexit concerns
• EUR/USD testing critical chart points below the 1.1250 area and opening the door for a retest of 1.05 if the pair could not reassert itself back above 1.13 area.
• USD/JPY hovering around the 114 area

Economic data

• (RO) Romania Oct CPI M/M: 0.5% v 0.4%e; Y/Y: 4.3% v 4.1%e
• (DK) Denmark Oct CPI M/M: 0.3% v 0.2%e; Y/Y: 0.8% v 0.7%e
• (DK) Denmark Oct CPI EU Harmonized M/M: 0.3% v 0.2%e; Y/Y: 0.7% v 0.6%e
• (TR) Turkey Sept Current Account Balance: $1.8B v $1.9Be
• (FR) Bank of France Oct Business (Industrial) Sentiment: 103 v 104e
• (SE) Sweden Sept Housing Price Indicator: 13 v 22 prior
• (CH) Swiss Total Sight Deposits (CHF): 577.2B v 577.5B prior; Domestic Sight Deposits: 475.6B v 469.9B prior
• (IT) Italy Sept Industrial Production M/M: -0.2% v -0.5%e; Y/Y: -1.8% v -0.8% prior; Industrial Production WDA Y/Y: 1.3% v 0.5%e

Fixed Income Issuance

• (IT) Italy Debt Agency (Tesoro) sold €5.5B vs. €5.5B indicated in 12-month Bills; Avg Yield: 0.630% v 0.949% prior; Bid-to-cover: 1.67x v 1.63x prior

Looking Ahead

• (MX) Mexico Oct ANTAD Same-Store Sales Y/Y: No est v 6.1% prior
• (PE) Peru Sept Trade Balance: No est v $0.1B prior
• 05:25 (BR) Brazil Central Bank Weekly Economists Survey
• 05:30 (DE) German Chancellor Merkel addresses Event Marking 100 Years of Women's Suffrage
• 05:30 (DE) Germany to sell €2.0B in 6-month BuBills
• 06:00 (SE) Sweden Central Bank (Riksbank) Dep Gov Floden
• 06:00 (TR) Turkey to sell Bonds
• 06:00 (RO) Romania to sell Bonds
• 06:00 (IL) Israel to sell Bonds
• 06:30 (CL) Chile Central Bank Economists Survey
• 06:45 (US) Daily Libor Fixing
• 07:00 (IN) India Oct CPI Y/Y: 3.6%e v 3.8% prior
• 07:00 (IN) India Sept Industrial Production Y/Y: 4.3%e v 4.3% prior
• 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)
• 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming auctions (bills on Tues)
• 08:05 (UK) Baltic Dry Bulk Index
• 08:50 (FR) France Debt Agency (AFT) to sell combined €4.3-5.5B in 3-month, 6-month and 12-month BTF Bills
• 09:30 (EU) ECB announces Covered-Bond Purchases
• 09:30 (EU) ECB's Nouy (SSM chief) wth ECB's Lautenschlaeger in Franfurt
• 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender =
• 14:30 (US) Fed's Daly (voter)
• 16:00 (US) Weekly Crop Report

During Friday's trading session, the European Single Currency was trading downwards to end the trading session at the 1.1319 mark. During Monday's morning hours, the currency exchange rate was located near the medium horizontal pattern line at the 1.1308 mark.

In regards to the near-term future, most likely, the currency exchange rate will keep trading downside towards the weekly S1 at the 1.1269 level breaking the support level of the medium pattern line at the 1.1300 mark.

On the other hand, the rate could be supported by the medium pattern line at the 1.1300 mark to recover itself to surge upwards to the 1.1340 level during the day.

During Friday's trading session, the currency rate passed through the support of the 200-hour simple moving average to end the trading session at the 1.2936 mark. On Monday morning, the British pound passed through the supports of the monthly PP at 1.2907 and the weekly S1 at 1.2899 to trade at the 1.2892 mark.

In regards to the near-term future, the British Pound will depreciate towards the 62.20% Fibonacci retracement level at the 1.2867 mark. Most likely, the rate will bounce off the support level of the 62.20% Fibo to trade sideways at the 1.2880 level during the trading session on Monday.

On the other side, the rate could pass through the support of the 62.20% Fibo to depreciate even more to be traded near the weekly S2 at the 1.2820 level.