Markets Look For Direction, While Nord Stream II And SMIC Are In The Cross-Hairs

A UK paper recycled the possibility that in the trade talks with the EU, it threatens access to its capital markets unless Brussels compromises. Such a move, until now, has been rejected for good reasons. It would threaten the special role of London in global finance. For sure, the UK can inflict some short-term pain and disruption on European companies and their capital-raising mechanisms, but the medium and long-term damage could be significant. Continental Europe has long wanted its own world-class financial center. The UK leaving the EU may be a challenge for London; denying European companies access would likely expedite a process.

More credibly, the Financial Times reported that the UK government is going to submit legislation as early as mid-week that overrides key sections of the Withdrawal Agreement relating to state aid and, critically, Northern Irish customs. The implementation of the Withdrawal Agreement is the keystone upon which the current trade negotiations are predicated. The government will likely claim it is merely re-interpreting the withdrawal bill and the Northern Ireland protocol. Still, Brussels will see it as the coup de grace of talks that the UK was not particularly serious about from the get-go.  Negotiations are to resume tomorrow, but surely these reports cast a pall over them, 

Following a disappointing factory orders report before the weekend (2.8% instead of 5%), Germany reported that July industrial output increased by only 1.2%. The median forecast in the Bloomberg survey was for a 4.5% increase after the 8.9% rise in June. Strength was seen in the auto sector, while machinery output fell. The government estimates that industry is about 90% back to pre-crisis levels. 

The euro has been confined to about a quarter-cent range above $1.1825. The euro found support in the last two sessions in the $1.1780-$1.1790 area. However, many participants seem reluctant to bid it up ahead of the ECB meeting on Thursday. There are about 1.2 bln euro in options in the $1.1800-$1.1810 that expire today and about 1.9 bln euros in options that expire tomorrow at $1.19. Sterling is near the pre-weekend low around $1.3175. It has fallen steadily today after rebounded to almost $1.33 in late activity before the weekend. The brinkmanship over Brexit trade talks could see the sterling test stronger support near $1.30. The euro is also rebounding against sterling after testing three-month lows last week (~GBP0.8865). The near-term potential is toward GBP0.9000-GBP0.9030.    

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Read more by Marc on his site Marc to Market.

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