Wall Street falls, Mexican peso jumps on budget proposal

Summary:

• G10 FX and equities move nowhere in early European trading

• Mexican peso drives higher as new president Obrador promises budget surplus in 2019

• Italian coalition agrees on the “numbers and contents” of the budget

Calm before the storm?

We are beginning the final full trading week this year with slight movements across currency and equity markets. However, before we move to analyse the most recent hours it is worth looking back to the Friday’s session on Wall Street where we saw substantial declines across the board. The SP500 (US500) fell 1.9%, the Dow Jones (US30) dipped 2% while the NASDAQ (US100) declined as much as 2.3%. There was no prime reason standing behind such a severe sell-off but market participants might have focused on some signals suggesting the impending global economic slowdown. First of all, a package of Chinese released turned out to be sub-par. Secondly, we got a bleak figure regarding a number of new cars registered in the European Union in November (it was the third consecutive fall in terms of annual terms as the sector has yet to shake out after the new carbon dioxide emission standards came into effect). The drops seen on Friday left the US stock market with a second successive week of losses and the US500 has shed 11% being on pace for its worst quarter since 2011. The start to the new trading week looks a bit more optimistic though. The Chinese indices are treading water and are following Wall Street’s footsteps while the SP500 futures are rising a touch more than 0.3% at the time of writing.

The US500 ended the Friday’s session nearby its critical support line placed at 2600 points. A sustained move below this line would begin an extended pullback at least toward 2540 points. Source: xStation5

Peso jumps on promising budget outlook

On the FX front we are very benign moves across the G10 space with rises and falls not exceeding 0.05%. Somewhat more interesting movements can be seen beyond the G10 currencies. For example, the Mexican peso is the strongest EM currency this morning as trader are digesting an array of upbeat comments coming from the new president Andres Manuel Lopez Obrador who was presenting his 2019 budget plan over the weekend. In spite of the fact that he promised more spending on social programs and infrastructure, a proposed primary surplus is to be 1% of GDP compared to a 0.8% surplus predicted by his administration for this year. Budget assumptions are (for one): 2% GDP growth, 3.4% inflation, USDMXN at 20, oil production of 1.847 mbpd, average export price for Mexican crude of $55 per barrel. The budget draft needs to be passed until December 31. In response to these proposals the peso is trading 0.6% higher against the dollar this morning. In turn, the Turkish lira is trading on the opposite side losing roughly 0.5% in anticipation of October’s industrial production and September’s unemployment data due this morning.

The USDMXN is falling this morning and from a technical viewpoints the pair could see some space to continue unfolding this trajectory. Source: xStation5

In the other news:

• Italy’s coalition has agreed on the “numbers and contents” of the budget it will propose to Brussels in order to avoid disciplinary action; the final agreement between the EC and Italy has yet to be reached

• France’s National Assembly President Richard Ferrand said the 2019 French budget deficit is likely to overshoot the EU limit of 3% of GDP after Macro announced wage increases and tax cuts in response to numerous riots across the country

• Australian government expects a higher budget surplus in the 2019/2020 fiscal year (4.1 billion AUD vs. 2.2 billion AUD seen in May)