The mid-term elections are now upon us and the results will be known early Wednesday morning. The only result that is predicted to create some market volatility is if the Democrats took control of both houses, but that looks unlikely.
Sterling has been recovering at the start of the week on expectations of a Brexit deal. The is despite the latest economic data, in the form of Purchasing Manager Surveys, suggesting that economic growth has slowed in the fourth quarter, from the previous quarter. Brexit concerns may be partly to blame but economic growth was probably boosted in the previous quarter somewhat by the World Cup and the pleasant weather we all enjoyed. Sterling has jockeyed between 1.28 to the USD and 1.33 from the summer months after failing to hold a strong rally at the start of the year. Currently, the pound stands in the middle of that range.
Concerns over the Italian economy are well documented along with how the Italian Government wishes to address the situation. The latest Purchasing Manager survey for the region could reinforce the Italian Governments position as the composite purchasing manager survey fell below 50 last month. An index reading below 50 suggests an economy that is in contraction, not expansion. Yields on the ten-year Italian bond rose post the news, for this very reason.
As economic data from Germany came in better than expected this week, as it did for most of Europe. Once again going to prove that trying to maintain a monetary policy suitable for two such different economies as Germany and Italy is virtually impossible. The ECB will be under pressure from Germany to speed up the pace of monetary tightening as signs of inflation picking up, whilst countries such as Italy still require that boost to remain in place. The euro fell against the US dollar.
The Bloomberg smart money index which tracks flows at the start and end of the day has continued a downward trend in the past week. Whether it’s a smart or dumb money flow index was questioned yesterday by analysts on the show. Dumb or smart, according to the analysis, at previous times in history after such outflows the index rallies approximately 7% in the coming weeks. We shall see.