Pay 2 play is an entertaining documentary about a dad driven to make the world a better place for his baby girl. John Ennis delves into the cycle of pay-to-play that dominates American politics. But when insiders control the game, how can an outsider have any influence?…OK then, so where am I going with this? Well GBP has been one of the top G10 performers overnight following comments from David Davis (UK Brexit minister) that the UK may pay the EU for market access. Reactions to the comments saw the GBP jump almost two big figures from 1.2511 to 1.2696 and although about half of the move has been reversed in the past few hours, Sterling is still up 0.6% relative to yesterday’s levels (currently at 1.2590).

The positive GBP reaction to David Davis comments is somewhat surprising given that we know Europe has no interest in letting the UK get off lightly. For one Davis did not mention how much the UK will need to pay in order to play while recent comments from French and German officials suggest the UK will need to pay a heavy price for voting to leave the EU. Short covering has probably also been a factor for the GBP rise overnight, but when looking at the fact we would still be incline to fade the move.

Looking at other markets reaction overnight, oil prices have continued to rise following yesterday’s OPEC production cut agreement with the move having a mixed impact across markets. The inflationary pressures from higher oil prices has seen an upsurge in bond yields across the board while equity markets are mostly weaker with the rise in energy stock countered by declines in Technology share amid concerns over Trump’s trade policy.

Looking at currencies in more detail, the USD is weaker against most currency with the DXY index down 0.55%. In G10, oil linked currencies have outperformed with NOK up 0.98% and CAD -0.88%. As mentioned above GBP has also gained some ground and the Euro is also another outperformer (+0.41). Gains in the EUR came off the back of a Reuters’ article that noted the ECB will extend its bond buying programme beyond March, but it will also consider sending a formal signal that the programme will eventually end.

This is a mixed message, an extension to the programme should be EU bond positive and EUR negative, but any signs of tapering should have the opposite effect. Reaction to the news suggest the market had already priced an extension to the programme with the suggestion of a potential tapering given a boost to the Euro and seen as catalyst for Bunds’ underperformance to US Treasuries overnight.

Relative to Sydney’s closing levels, 10y UST have climbed another 5bps to 2.45% while 10y Bunds ended the day 8bps higher at 0.634%.

As for data releases, the US ISM Manufacturing index rose to 53.2 marginally beating expectations of 52.5 and Europe’s unemployment rate dropped to 9.8% beating expectations of 10% read.

Coming Up

We have a couple of tier one releases on the roster today starting with Australian retail sales figures followed by US employment data this evening. Then of course we have the Italian referendum and Austrian presidential election over the weekend.

This morning in Australia the ABS releases retail sales figures for October and the market is looking for a 0.3% rise down from the 0.6% print in the previous month. NAB expects moderate but still positive growth of 0.4%.  Retail business conditions in recent months have shown signs of softening that we expect to be reflected in some trend slowing in the Statistician’s measure of sales, 0.4% growth coming after 0.6% in September.

Yesterday’s stronger than expected ADP measure of private payroll (216k gains) increases the probability of a solid non-farm payrolls print tonight. Bloomberg is currently showing consensus expectations at 180k, but the whisper number appears to be somewhere in the region of 210-220k. The falling trend in jobless claims in recent months is one supporting factor for a strong print while “a payback” from hurricane Matthew is another. The unemployment rate is seen unchanged at 4.9% and hourly earnings are expected to remain unchanged at 2.8% on a yearly basis, but down on a monthly basis to 0.2% from 0.45 previously.

The New York ISM is also due for release and we have a series of Fed speakers tonight and over the weekend. Starting with Fed Mester and Kaplan this evening, followed by Brainard and Tarullo early on Saturday, culminating with Dudley on Sunday.

Italy goes to the polls this Sunday 4th December in a referendum on the Constitution. Why should we care? A no vote is seen as a destabilising force for the Euro and the EU on the basis that it provides further impetus to the rising nationalistic and anti-immigration movement in Europe. In addition a “No” vote is also seen as a source of instability for the Italian economy with many concerned over the impact on bond yields and a banking system in desperate need for recapitalisation. Meanwhile the second round of the Austrian presidential election is also taking place on Sunday and although it will surely be overshadowed by the Italian referendum, a win by the far-right Freedom Party led by Norbert Hofer will no doubt increase concerns about the survival of the European Union and the Euro. Moreover it will also likely set the tone on expectations for the general elections in Holland, France and Germany next year. We think political instability will play a significant role on the direction of the Euro over the coming months with the above mentioned elections coupled with Brexit negotiations seen as potential sources of heightened volatility. As for the AUD, given its risk sensitivity, a big risk off move triggered by a Euro sell off would most likely put the currency under pressure.

Overnight

On global stock markets, the S&P 500 was -0.48%. Bond markets saw US 10-years +6.18bp to 2.44%. In commodities, Brent crude oil +3.55% to $53.68, gold-0.3% to $1,167, iron ore +8.7% to $78.36. AUD is at 0.7415 and the range since yesterday 5pm Sydney time is 0.738 to 0.7418.

For full analysis, download report:

•  Markets Today:  2 December 2016(PDF,133kb)

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