It was a tumultuous week for equities last week, and there was no clear or obvious trigger. With US bond yields and equities trending higher this year, there does not seem to be a reason why it ended last week. Similarly, the recovery before the weekend, which lifted the S&P 500 back above its 200-day moving average, did not appear to have a trigger. Britain and the EU paused negotiations till Brussels Summit as talks between British Brexit Secretary Dominic Raab and EU negotiator Michael Barnier failed to resolve key issues, including the backstop for Ireland/Northern Ireland to avoid a hard border.
The EU is insisting that Britain gives assurances that if the UK-EU trade deal falters, then the British province of Northern Ireland will remain inside the EU’s economic rules. However, British PM Theresa May and her allies in Belfast are rejecting that. Further, the head of the Norther Irish Party, which props May’s government, reportedly said on Friday that it is “ready” to trigger a no-deal Brexit and now regards it as the “likeliest outcome.”
As a result, GBP gapped lower in Asia and could remain under pressure into Wednesday’s EU summit. The Italian cabinet is due to meet on Monday to approve a 2019 budget and confirm the budget deficit target of 2.4% of the gross domestic product. Italy must send its planned fiscal framework to Brussels and the European Commission might reject it or ask for changes, setting up the stage for a possible clash and keep exerting some downward pressure on the common currency.
Focus today will be the U.S. retail sales report which will give clues about consumer sentiment in September. Consensus sees healthy pick-ups in both the core and headline readings. Also, later today is the BOC Business Outlook Survey from Canada at 14:30GMT which is released quarterly.