• All eyes were on Europe this morning with the publication of PMI business confidence for November. It topped the bar on all accounts. Both manufacturing and services defied expectations for a further decline: the former rising from 46.4 to 47.3 and the latter stabilizing at 48.6. The composite PMI rose as a consequence from 47.3 to 47.8. That said, this is still below the neutral 50 level. S&P Global currently expects the EU economy to contract by 0.2% q/q in the running quarter. Demand is clearly weakening following the cost-of-living crisis with depleting order books, causing companies to eliminate backlogs at the fastest pace in two years and to be cautious in their hiring intentions. Yet, the November report offers a glimpse of hope. While both input and output prices continue to advance to very elevated levels, they do so at a (significantly) slower pace. Companies note the weakened demand has alleviated pressures on supply chains. And business optimism in the services sector – though still low – further improved while pessimism in the manufacturing sector greatly fell back due to concerns on supply chains and energy rationing having eased. The decelerating inflation trend is what defined the initial market response, mainly in European yields. They fell from intraday highs to lows before recovering later on, especially at the front of the curve with high inflationary pressures leaving the ECB no choice but to tighten further, whatever the economic cost. Daily changes in Germany range between -2.9 (10-y) to +5 bps (2y). Peripheral yield spreads vs Germany’s 10y narrow with Italy (-6 bps) outperforming peers. The Italian/German spread is moving towards levels last seen in May/June this year. US yields rose a few bps too initially but momentum snapped in early US dealings with the curve now showing declines between 2.5 and 6.3 bps. Markets await the publication of the November FOMC meeting minutes in which they will look for clues whether the 5% terminal rate that’s currently priced in is what Powell had in mind when he said the “ultimate level of interest rates will be higher than previously expected” at the Nov 2 meeting.
• In other markets, oil takes a serious beating after the Russian oil price cap under discussion is seen high enough to keep flows running to the bloc (see below). The Canadian dollar, sensitive to oil, loses out today. Trading in the Norwegian krone is often oil-driven too but not today. Scandinavian currencies, the SEK included, are catching a nice, broad bid. Stocks show little direction. The EuroStoxx50 gains modestly and so does WS at the open. The dollar is trading in the defense on the currency market. The greenback loses about half a big figure on a trade-weighted basis. DXY is currently changing hands around 106.81. EUR/USD is testing the May interim low around 1.035, up from 1.03. Sterling is better bid today, with better-than-expected though still-gloomy UK PMIs delivering a small push in the back. Technical factors helped too with EUR/GBP bouncing off the 0.87 big figure resistance level. The pair currently trades around 0.862 and is testing the upward sloping trendline connecting the August and October lows.
• G7-nations are expected to propose a price cap on Russian oil between $65 and $70 a barrel, according to sources. This range is in line with the historical average from before the invasion and is on the higher end of what was expected given that it’s way above Russia’s oil production cost. The price cap would ban companies from providing shipping and services, such as insurance, brokering and financial assistance, needed to transport Russian oil anywhere in the world unless the oil is sold below the agreed threshold. Industry experts say that Russian oil is currently trading around $65/b. That’s a significant discount compared to eg Brent prices, but in line with the proposed cap. Therefore, its impact should be limited. Brent crude fell from $89/b to $86/b.
• The UK Supreme Court ruled that the Scottish government needs agreement from Westminster to have legal authority to hold an independence referendum. Under current devolution law, legislation relating to the union between Scotland and the UK is reserved for Westminster. Scottish PM Sturgeon hoped to hold a referendum in October next year. The previous one dates back to 2014 when 55% of the voters wanted to maintain in the UK. Sturgeon told a press conference that she would seek to make the next UK general election in 2024 a de facto referendum on independence.