The Pound Drops to Test the October Lows Driving the FTSE to Fresh Highs

European yields are mixed with Gilts underperforming, while the FTSE 100 hits fresh highs, as Sterling lifts from recent lows against the EUR. Still, Gilt cash yields are down and the FTSE 100 continues to tests new highs while the DAX is at levels last seen in 2015 as oil prices rebound from lows and with WTI holding above USD 51 per barrel. Investors are waiting for Trump’s press conference, the first since he has been elected. The European calendar focused on the U.K., which reported stronger than expected production growth for November, which was counterbalanced, however, by a widening of the trade deficit.

Eurozone institutes see steady growth of 0.4% quarter over quarter through to Q2. The joint forecast of the Ifo, Insee and Istat institutes sees growth of 0.4% quarter over quarter, in Q4 2016, as well as Q1 and Q2 this year. Investment is now expected to outperform consumption and annual rates are expected to be around 1.5% and inflation is expected to jump to 1.5% in Q1 and Q2 from 0.7% in Q4 2016. 1.5% is still below the ECB’s definition of price stability, but still, the marked uptick, and the fact that German rates are clearly above the Eurozone average, are reviving criticism of Draghi’s very expansionary policies.

UK production figures for November beat expectations, rising 2.1% month over month and 2.0% year over year, up from -1.1% month over month and -0.9% year over year. Expectations had been for growth of just 0.6% month over month and 0.3% year over year. Manufacturing output came in with growth of 1.3% month over month and 1.2% year over year, up from -1.0% month over month and -0.5% year over year in October.

Trade Figures Offset Solid Production Data

The encouraging production data was offset by an unexpected construction output and November trade data showing a GBP 3.3 billion leap in imports, which dwarfed a GPB 700 million rise in exports, leaving the trade deficit at a much wider than forecast GBP 4.2 billion. The trade data evidences that the weaker pound won’t be a one-way street. The pound tipped about 50 pips lower versus the dollar after an initial pop in the immediate wake of the data releases.

German machinery orders rebounded in November, climbing 5% year over year, after falling -10% in the previous month. Domestic orders recovered 3%, while foreign orders growth accelerated to 5%. Domestic orders though have recovered remarkably, with the trend rate now back at 2%, versus -6% in the three months to October and -12% in the three months to September.

Oil prices recaptured the 51 handle barely, after trading under pressure during the last 2-trading sessions. A larger than expected build in crude oil inventories along with robust increases in both gasoline and distillate inventories, appear to have been the catalyst that drove the markets lower early in the week. Traders now await the EIA data released later on Wednesday.