US investors return briefly from the Thanksgiving bank holiday on Friday, although the session is likely to be very quiet given the early market close and the lack of events on the calendar.
In the past, this has been a very quiet day and I don’t expect this to be any different. We have a few pieces of data being released – flash services, manufacturing and composite PMIs – but under the circumstances I’m not expecting much from them. Equity markets are poised to open marginally higher and not far from record highs but I think people’s minds will already be on next week.
USD Extends FOMC Minutes Decline
The dollar is coming under pressure again on Friday, adding to losses made since the release of the FOMC minutes on Wednesday that cast doubt on the number of rate hikes we can expect going forward. While a December increase is already priced in, there is a growing number of policy makers that are concerned about persistent sluggish inflation, as well as potential financial market imbalances, which could impact the tightening process.
The drop off we’ve seen in the dollar since the release of the minutes suggests traders are anticipating a slower tightening process in response to the minutes although I remain unconvinced. When you consider how well the economy has performed over the last couple of quarters, the strength of the labour market and the likelihood that tax reform will pass, there’s plenty of reason to expect interest rates to rise and, in turn, the dollar.
DAX Underperforms as SPD Reopens Door to Talks
The DAX is continuing to underperform most of its peers this morning, despite the SPD reopening the door to negotiations with Angela Merkel’s CDU party in an attempt to restore political stability and avert another election. Investors remain sceptical about the talks which is unsurprising given that the SPD was previously opposed to a coalition, having suffered big losses after serving as a junior partner over the last four years.
It seems some members of the party though would like to pursue talks in order to avoid going to the polls again, with the advances made by AfD and the FDP possibly behind the sudden change of heart. It’s unclear what agreement the two will come to though, with Merkel having previously been unwilling to serve in a minority government. Perhaps her mind can be changed if certain assurances are provided by the SPD although another coalition is surely the most desirable outcome. Weekend risk is also playing a part here with a collapse in talks over the next 48 hours likely weighing at the open on Monday.
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