EU MID-SESSION UPDATE: GBP remains a key focus for markets amid May’s potential showdown in Parliament. Political concerns grip Italy with a date now set for domestic elections

European equities (Eurostoxx flat) trade with little in the way of firm direction with the reduction in the GOP’s Senate majority following Democrat Doug Jones’ victory in Alabama seeing little follow through into European trade. The FSTE MIB (-0.4%) lags its peers amid political concerns after Italian parties have agreed to hold elections on March 4th, subsequently reinvigorating concerns over the rise of anti-establishment sentiment in the nation via the 5Star movement. In terms of sector specific performance, consumer discretionary names are the notable outperformers, bolstered by Spanish heavyweight Inditex (+4.2%) in the wake of their latest earning release.

In FX markets, the USD Index is just clinging on to the 94.000 marker and paring broad basket losses made in the wake of Alabama’s election result. However, the next major directional move (towards 94.500 or 93.500) will likely come from the FOMC tonight, notwithstanding CPI data after Tuesday’s firmer than forecast PPI readings. GBP is Holding above lows vs the USD and EUR with GBP not swayed too much by the latest UK jobs report which saw a slightly higher unemployment rate and an unexpected uptick in ex-bonus earnings. Focus for GBP will likely continue to centre on politics with today’s parliamentary vote on the Brexit bill, with the opposition Labour Party affirming that it will side with Tory rebels wanting a say on the divorce deal. AUD continues to outperform (just) after upbeat survey news overnight (Westpac consumer index at 100+ multi-year high and sentiment rebounding to positive territory).

Another relatively tame reaction to UK data, and this time for good (fundamental) reason as the latest labour and wage update is somewhat contradictory. Gilts have slipped to a marginal new Liffe low at 124.63 (13 ticks under yesterday’s close, albeit 23 ticks below best levels seen so far) and the Short Sterling strip has reversed earlier gains of 1 tick and a tad more. However, these losses are far more contained compared to the downside seen in the Eurozone where Bunds appear to have been dragged down by more pronounced selling in peripheral bonds, and especially Italian BTPs on political jitters – president to dissolve Government at the end of the month and elections to be held in early March 2018. The 10 year German benchmark has been down to 162.91 (-36 ticks vs +13 ticks at best), while its Italian peer traded at 138.90 (-85 ticks) and the yield 5+ bp higher pushing the spread to Germany over 4 bp wider. From a tech perspective, Bunds may look towards 162.79-74 next. Elsewhere, US Treasuries are inching lower (through Tuesday’s lows) and the curve is fractionally steeper in typically defensive pre-FOMC fashion.

In the commodities complex, energy prices trade modestly higher in the wake of yesterday’s API report which showed a larger than expected drawdown in headline crude stockpiles (-7.382mln vs. Exp. -3.8mln). Elsewhere, spot gold trades with little in the way of notable direction, whilst copper has seen some support from the broadly softer USD during London trade in what was otherwise a relatively subdued session overnight for the complex.

13 Dec 2017 - 10:12- Important- Source: RANsquawk

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