Court Throws Brexit Curveball

The British pound rose sharply Thursday after England's High Court ruled the U.K. government must hold a parliamentary vote before triggering an exit from the European Union (EU). The decision casts doubt on Prime Minister Theresa May's tentative plans to invoke Article 50 of the Lisbon Treaty by March 2017 and sets up a constitutional confrontation at the country's Supreme Court next month. Judge John Thomas said allowing the Prime Minister to unilaterally trigger the U.K.'s departure from the EU without parliament's approval based on a non-binding referendum amounted to an unconstitutional usurping of domestic law. A spokesman for the U.K.'s Supreme Court said it will likely hear the case from December 5-8, with all 11 judges expected to participate for the first time in the tribunal's seven-year history, according to Reuters.

The news sent shockwaves through European finance and politics, with the pound rising nearly 2% against the euro and 1.5% against the dollar to three-week highs. European bank shares, which have sold off sharply amid concerns over uncertainty regarding post-Brexit passporting rights, rallied more than 1% while the spread between domestically-focused U.K. mid-cap stocks and stocks in the more globally-focused FTSE 100 index reached their widest spread since 2009.

The ruling offered relief to investors worried about May's plan for a "hard Brexit" that would rob U.K. businesses of access to the European single market. Parliament was decidedly anti-Brexit leading up to the late-June referendum, with 74% of lawmakers supporting the "Remain" camp. Members of Parliament (MPs) may amend their position given 61% of their constituencies voted to leave the EU, but they are seen as favoring the negotiation of better economic terms for the U.K.'s separation from the continental bloc.

Also contributing to improving sentiment in the U.K. was news Bank of England (BOE) Governor Mark Carney would continue in his current role until 2019. PM May hurt his feelings two weeks ago by criticizing the destabilizing effects of loose monetary policy, but private conversations apparently reassured him the central bank would remain independent from political meddling during the Brexit process. Carney will serve one year longer than he previously intended in order to provide continuity amid uncertain times, although he will step down for "personal reasons" three years before the end of the customary term for BOE governors.

While last week's post-Brexit GDP reading offered the British hope of weathering the storm, more forward-looking indicators forebode darker clouds on the horizon. HSBC analysts Robert Parkes and Amit Shrivastava said this week: "Post Brexit, international investors continue to head for the exit. Since the Brexit vote, holdings of the UK have fallen by more than 100 basis points. Relative to history (on a z-score basis), the UK is now the most out of favour region globally."

While U.K. manufacturers continue to benefit from a weaker domestic currency, the sharpest increase in purchasing costs in 25 years could end up putting a strain on business.

Stocks Suffer Longest Losing Streak in 36 Years Amid Election, Fed Jitters

U.S. stocks have now declined for nine straight days, their longest losing streak since December 1980. While the daily losses have not been particularly steep, the risk-off attitude reflects increasing jitters over the election and expectations for a December rate hike brought on by rising inflation.

In mid-October markets were essentially pricing in a Hillary Clinton presidency. She had a seven-point lead in the RealClearPolitics national polling average with clear advantages in most swing states. Nate Silver's FiveThirtyEight polls-plus prediction model gave her around an 85% chance of winning the Electoral College. And with Clinton viewed as the more known commodity from an economic perspective, markets were relatively buoyant.

Fast forward two weeks and the picture has changed dramatically. Clinton's lead in the RealClearPolitics average dipped to as low as 1.3 points on Wednesday while Nate Silver's model now gives Donald Trump a 35% chance of winning the Presidency. Rising inflation seemingly cemented expectations for a December Fed hike - with odds of a rate increase reaching 78% on Wednesday - only for the election to take over as the driving force behind recent market action. The Mexican Peso, which has largely tracked Trump's poll numbers, also sold off during the latter part of the week while demand increased for safe haven currencies like the Japanese Yen and Swiss franc.

Despite all data pointing toward the type of inflation sure to give the Fed confidence about tightening policy, by Friday expectations for a hike had fallen all the way to 67%. After another week of strong data, the only thing able to derail a December hike would be a disorderly market reaction to Tuesday's election. Expectations of a Trump victory and odds the Fed doesn't hike in December are now basically in line - read into that parallel what you may.

Now for a closer look at a busy week of data that likely offered positive signs about the U.S. economy:

On Monday data showed Personal Consumption rising by 0.5% in September, exceeding market expectations for a 0.4% increase. The reading was the highest since June, taking the Fed's favored inflation benchmark to 1.2% through the first three quarters of the year - the fastest pace in nearly two years. Consumer spending, which accounts for around two-thirds of total economic output in the U.S., has provided much of the impetus for the post-crisis economic recovery. However, last week's GDP reading showed personal consumption expenditures declining sharply in the third quarter (down from 4.3% in Q2 to 2.1% in Q3) amid a decline in consumer confidence blamed on the election (The University of Michigan Consumer Sentiment Index hit a two-year low in October). The bounce back in spending will give the Fed further confidence in pulling the trigger on a rate hike.

On Tuesday the Institute of Supply Managers (ISM) manufacturing survey also came in higher-than-expected. The gauge of factory activity grew from 51.5 last month to 51.9 in October (versus expectations of 51.7) driven by better-than-expected rises in production and hiring. The ISM services prices index also grew by the most since 2014, another sign of rising inflation. On Thursday the headline ISM non-manufacturing survey fell short of expectations (54.8 actual vs. 56.0 expected) but the purchasing managers index (PMI) component, another inflation gauge, was in-line with expectations.

Data released Friday did nothing to change the narrative. The U.S. trade deficit fell 10% to a 19-month low despite persistent headwinds from a strong dollar. And then there was the big one: another encouraging jobs report.

While the U.S. economy added only 161,000 jobs in October, below expectations for a net increase of 173,000 non-farm payroll, wage growth (a key driver of inflation) accelerated to its fastest pace since the recession. Average hourly earnings for private sector workers climbed 2.8% year-over-year, the largest increase since June 2009. Additionally, jobs numbers for August and September were revised higher by a combined 44,000. Despite only modest headline job gains, the unemployment rate fell to 4.9% from 5.0% due to a slight decline in labor force participation. Economists also believe October's job gains were depressed by Hurricane Matthew, which battered the Northeast U.S. While the report was not blockbuster by any means, it will not adversely affect the Fed's thinking about a rate hike.

With all the recent talk focusing on the Fed's December meeting, one could be forgiven for overlooking the Federal Open Market Committee (FOMC) policy decision this week. Odds of November hike were only around 15% because of the meeting's proximity to the election and the fact it wasn't followed by a press conference, but the accompanying statement provided useful clues about the Fed's thinking.

As expected, the FOMC kept rates steady while priming the market for a December hike. Two Fed officials - Esther George of Kansas City and Loretta Mester of Cleveland - dissented in favor of raising rates while Boston's Eric Rosengren, who voted to raise rates in September, this time sided with the majority based on a willingness to wait a few weeks to hike.

Goldman Sachs worries a strong dollar, which is at its highest level since March 1, could derail the Fed's plan. However, most traders appear to be on the same page with Fed officials regarding inflation. The U.S. Treasury yield curve rose to its steepest since June with inflation expectations hitting their highest level in 16 months. Following the bond market's worst month in six years investors continue to pull money from credit exchange-traded funds at a high rate. Meanwhile, demand is soaring for Treasury Inflation-Protected Securities (TIPS), whose principal and coupon payments are adjusted for inflation.

All told the U.S. economy is improving and financial markets are normalizing into year-end, but everything could change if the wild-card wins on Tuesday.

Oil Prices Plummet on Doubts over OPEC Production Cut

Oil prices fell sharply this week amid concerns over OPEC's ability to implement its ambitious plan to curb production.

In late September oil futures soared after OPEC agreed to its first production cut in eight years, but all those gains have now been undone by internal squabbling. Iraq on Monday joined Iran, Nigeria and Libya in seeking exclusion from initial production cuts. All of the countries are arguing they should be given a chance to normalize output based on conflict-driven disruptions, but Iran's fierce geopolitical rival Saudi Arabia is apparently having none of it. Reuters reported Friday the Saudis plan to raise production and withdraw from future meetings if the other parties to the agreement did not cooperate, although a Bloomberg report later refuted the story. In the meantime, OPEC production is expected to remain at record highs.

Adding to the downward pressure Wednesday the Energy Information Administration (EIA) reported crude inventories grew by 14.4 million barrels to 482.6 million barrels, well above the forecasted increase of 1.1 million.

Add oil, which is down more than 12% from recent highs only two weeks ago, back to the list of destabilizing forces in global financial markets (as if it ever left).

Corporate Dealmaking Remains at Elevated Levels

The mergers and acquisitions (M&A) boom continues.

General Electric is combining its petroleum-related business with Baker Hughes to create a new, diversified $32 billion publicly-traded entity with capabilities spanning oilfield services to equipment manufacturing to technology development. Telecom firm CenturyLink agreed to buy internet-service provider Level 3 Communications for $24 billion in cash and stock to boost its broadband infrastructure. Investors didn't like the deal as CenturyLink stock fell 8%. Management teams in both deals cited "synergies" from cost-cutting as a principal motivation for joining forces.

The Blackstone Group is conducting its first public-company leveraged buyout in three years, purchasing TeamHealth, a company offering outsourcing services including emergency medicine, anesthesiology and ambulatory care to hospitals and physician groups, for $6.1 billion (a 33% premium to its most recent closing price).

Broadcom, a semiconductor maker, is buying Brocade Communications, a data-storage and networking provider, for $5.9 billion. Broadcom's semiconductors are already used in Brocade's networking equipment.

However, not all love was true this week. Gannett, which owns USA Today among many other newspapers, pulled out of a deal to acquire Tronc, which most notably owns the LA Times and Chicago Tribune, causing the latter's stock to fall 20%.

Investment bankers are reaping the benefits of elevated deal flow. M&A revenue as a percentage of total banking fees are at 32%, well above their historical 28% average and representing their highest share since 2008. October was one of the busiest months for deal-making in history.