I. Yesterday's News 1. Italian Prime Minister Matteo Renzi vowed to resign after suffering a crushing defeat on Sunday in a referendum on constitutional reform, tipping the euro zone's third-largest economy into political turmoil. His decision to quit after just two and a half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year. The euro fell to 20-month lows against the dollar, with markets worried that instability in the euro zone's third largest economy could reignite a dormant financial crisis and deal a hammer blow to Italy's fragile banking sector.
2. U.S. services sector activity hit a one-year high in November, with a surge in production boosting hiring, further evidence of strength in the economy that clears the way for the Federal Reserve to raise interest rates next week. The ISM said its non-manufacturing activity index jumped 2.4 percentage points to 57.2, the highest reading since October 2015. Services industries reported a 4 percentage point surge in production last month. A measure of services sector employment soared 5.1 percentage points to a 13-month high. While industries reported a modest decline in new orders, the new orders gauge remained well above expansionary territory. A sub-index for export orders increased solidly last month.
3. Federal Reserve officials cautioned on Monday that the incoming Trump administration's economic plans should not be cast as if the economy is in crisis, but instead be designed to help the economy's long-run prospects. Fed officials worry there is risk that overly aggressive fiscal, tax and other changes could become inflationary given the economy's current strength. That could force the Fed into more rapid interest rate increases and possibly raise the risk of recession. Yet there is also potential, officials feel, for well-designed tax, regulatory and infrastructure spending to boost the country's lagging productivity.
4. Euro zone finance ministers agreed on Monday to grant Greece short-term debt relief measures that would reduce the amount of the country's public debt by 20 percentage points of GDP by 2060, euro zone officials said on Monday. Speaking after a meeting of euro zone finance ministers, the head of the euro zone's ESM bailout fund Klaus Regling told a news conference the implementation of the measures would take a while, but the fund would start the process in the coming weeks.
5. A slump in British manufacturing is showing signs of lifting thanks to higher new orders at home and the prospect of more demand from abroad spurred by the fall in the value of the pound after June's Brexit vote, a survey showed on Monday. A stabilisation in oil prices - which could lead to more orders from the petroleum sector - helped to improve the outlook for the sector, the survey showed. But increasing inflation pressures and a squeeze on profits meant manufacturing was still likely to contract in 2017. Output for manufacturers picked up significantly with the balance of firms reporting growth jumping, the first time the overall balance was positive since the second quarter of 2015, EEF and BDO said.
6. New Zealand Prime Minister John Key, who won praise for his economic stewardship after the global financial crisis, unexpectedly announced his resignation on Monday, saying it was the “right time” to leave politics after more than eight years in power. Key said he had no immediate future plans, but told reporters he would stay in parliament long enough to avoid a by-election for his seat. Key cited family reasons for his departure. The New Zealand dollar fell around 1 percent to $0.7075. Key said he would vote for Bill English, deputy prime minister and finance minister, if he stood for party leader and prime minister at the December 12 caucus meeting.
II. Market Overview FX The euro jumped against the U.S dollar on Monday after Italian Prime Minister Matteo Renzi's loss in a referendum over constitutional reform, a defeat that traders had widely expected. Expectations that the European Central Bank (ECB) will hint at reducing its bond purchase program when it meets this Thursday is also seen as adding to strength to the single currency. The euro gained 0.96 percent to $1.0774, after earlier rising to $1.0796, the highest since Nov. 15. The dollar index, which measures the greenback against a basket of six major currencies, slipped 0.67 percent to 100.09, after earlier dropping to 99.849, the lowest since Nov. 15 as investors viewed recent dollar strength as overdone.
Precious Metals Gold fell to its lowest price in 10 months on Monday as global equities strengthened and investors shrugged off worries of political instability in Italy, while U.S. Treasury yields rose after U.S. economic data. Spot gold fell by as much as 1.6 percent to its lowest since early February at $1,157 an ounce, down more than $30 from the session high. It was last at $1,169.86. U.S. gold futures settled down 0.1 percent at $1,176.50 per ounce.
Commodities 1.Crude Oil U.S. crude futures strengthened Monday before retreating in post-settlement trade as the market lost confidence OPEC cuts would be sufficient to reduce oversupply given increased U.S. Drilling. U.S. West Texas Intermediate crude rose early in the day and began to pare gains in the late afternoon, settling at $51.79 a barrel, up 11 cents or 0.21 percent, before retreating to as low as $51.11 a barrel. Brent crude settled at $54.94 a barrel, up 48 cents - or 0.88 percent - before retreating to $54.22 a barrel.
2. Base Metals A slide in the dollar and buying by computer-driven funds helped to push zinc, copper and other base metals higher on Monday, traders said, though some expected the move to be short lived with further declines likely before the end of the year. Benchmark zinc on the London Metal Exchange surged 3.7 percent to close at $2,766 a tonne, bouncing from a 2.2 percent loss on Friday. Three-month LME copper climbed 3.3 per cent to end at $US5,950 a tonne. LME nickel rose 1.6 per cent to finish at $US11,640 on the prospect of falling supply from the Philippines.
U.S. Treasuries Longer-dated U.S. Treasury yields fell in choppy trading on Monday as investors viewed the dramatic bond market sell-off following Donald Trump's surprise U.S. presidential win as overdone. The benchmark 10-year Treasury note yield was down 0.5 basis point at 2.385 percent, while the 30-year bond yield fell 1 basis point to 3.051 percent. The two-year yield rose more than 1 point at 1.124 percent.
Stock Market 1. U.S. Equities Wall Street rose on Monday, with the Dow Jones industrials setting fresh record highs, as services sector data gave further evidence of strength in the domestic economy. The Dow Jones industrial average rose 45.82 points, or 0.24 percent, to 19,216.24, the S&P 500 gained 12.76 points, or 0.58 percent, to 2,204.71 and the Nasdaq Composite added 53.24 points, or 1.01 percent, to 5,308.89.
2. Hong Kong Equities Hong Kong stocks closed at two-week lows on Monday as the launch of the Shenzhen-Hong Kong investment link received a muted response, with risk appetite curbed by the Italian referendum result and a tumble in mainland shares. The main index in Hong Kong fell 0.3 per cent, to 22,505.55 points at the close, while the Hong Kong China Enterprises Index lost 0.7 per cent, to 9,711.80 points. Most sectors lost ground in Hong Kong, with an index tracking mainland property developers listed in the city among the worst casualties, falling over 2 per cent. The slide was partly driven by a 7.5 per cent slump in Vanke.
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