Brussels trip surfaces new issues instead of solutions

Einstein’s theory of madness is defined as doing the same thing over and over and expecting to see a different result. Theresa May made a trip to Brussels yesterday with the highly optimistic hope that she may see a change of heart from EU Commission President over the terms that the UK has negotiated to leave the EU. She returned home seemingly empty-handed as new issues sprang up.

Spain plans to veto the deal over Gibraltar, Denmark is concerned (along with others) over its North Sea fishing rights, and Dublin remains worried over the backstop and its border.

There is an extraordinary summit of EU Leaders planned for Sunday and, for now, there is an air of optimism about the outcome. Angela Merkel followed a comment earlier in the day in which she said she would not attend unless the terms of the agreement were agreed in advance by saying she is confident of the deal being ratified although she openly said she has no idea how the Gibraltar issue will be solved.

I may be proved wrong, but it does seem that Mrs. May has seen off another challenge to her leadership. She has staunchly ignored the domestic issues swirling around her and stuck to her guns. That is admirable but it is doubtful that she can get the deal through Parliament by personality alone.

May plans a further visit to Brussels at the weekend, prior to the summit, but until she can show some change to the original arrangements for the future relationship (the document for which has grown from seven to twenty pages!) she will continue to suffer from Einstein’s theory.

The pound drifted yesterday in a 1.2821/1.2764 range versus the dollar, closing lower on the day at 1.2773. It has remained close to the bottom of its range versus the single currency following last week’s fall closing yesterday at 1.1222.

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Rumours of Rome/Brussels deal a little premature

There were stories circulating yesterday that Matteo Salvini, the Italian Deputy Prime Minister and self-proclaimed chief protagonist in the row with Brussels over next year’s Italian budget, may be prepared to soften his stance.

It was understood that he may be prepared to agree to revisit the fiscal plans in the budget to help reduce the deficit of 2.4% of GDP to closer to the 0.6% previously agreed.

There was little evidence of such a concession being in Salvini’s mind as he continued, in public at least, to rail against Brussels insistence upon Rome complying with the growth and stability pact.

Valdis Dombrovskis, ex-Latvian Prime Minister and now a senior official of the EU Commission, commented yesterday that Italy is “sleepwalking into instability” by insisting on the implementation of its current plans. There may be some doubt as to whether Rome is doing the right thing in attempting to kick-start its economy but one thing is certain, it has a very good handle on what it is doing. This issue will continue to rumble on with Brussels unlikely to want to make any significant move towards sanctioning Rome ahead of this weekend’s summit despite the threat of a frosty reception for Italian Prime Minister Giuseppe Conte.

Italy’s actions are an echo of its past economic policy. However, the current spat is starting to take on the appearance of Brussels continued intransigence which has manifested itself in several ways over the past few years. Perhaps a more conciliatory approach may have won over the people of Europe to the idea of a more “Federal Superstate”.

Yesterday, the single currency followed the rest of the market in taking something of a breather it rose just thirteen pips on the day, closing at 1.1382.

Thanksgiving brings a pause for breath

Jerome Powell, the Chairman of the Federal Reserve, will tuck into his Thanksgiving turkey later today with more on his mind than he has had to contend with during the entirety of his, admittedly short, tenure in the role.

Powell has surprised markets and upset the President by raising rates three times already this year with the probability of a fourth next month. The markets have backed Powell’s view, seeing the tightening of monetary policy as the correct course of action given the growing strength of the economy and the outlook for GDP.

However, markets that are driven by sentiment, as well as hard fact, can “turn on a dime” and changing sentiment has been what has seen the recent falls in equity markets as well as the lag in the effect of rate hikes, the fading influence of fiscal stimulus and the fears of a general slowdown in the global economy.

Durable goods orders are a notoriously fickle piece of economic data. Since they record the new orders for “big ticket items” like planes and ships etc., it is clear why the number varies dramatically from month to month. However, yesterday’s release showing a 4.4% fall in October versus a market expectation for a 2.5% fall brought the current situation into sharp focus. As we approach month end, data will be scrutinized even more closely for tell-tale signs of a coming rough patch for the economy. The markets certainty over the rate hike next month has waned a little. it is still likely to happen but may be the last for a little while.

The dollar index also traded a narrow range yesterday between 96.87 and 96.49 and the rest of the week is expected to be slow as the U.S. celebrates Thanksgiving and takes a four day holiday.