Markets brace for Italian referendum this weekend

Today's Highlights

• Markets brace for Italian referendum this weekend

• Pound surged to an eight week high against the Dollar

• Federal Reserve likely to raise rates

Current Market Overview

US job data is the next focus for today before all eyes turn to the Italian referendum. Job growth has been relatively mild over the past few months but the Federal Reserve continues to talk up the improvements in the labour market. The Non-Farm Payroll (NFP) report is expected to grow 170k in November. Jobless claims have been low, confidence is at a 9 year high, according to the conference board report and the precursor to Non-Farm Payroll, the Automatic Data Processing (ADP) report, yesterday showed solid growth of 216k in private sector jobs, up from prior month's 119k. Judging from recent US data, NFPs are expected to be a solid report, with room for an upside surprise.

The December Federal Reserve interest rate hike is viewed as a done deal and the market is looking beyond that. Fed fund futures are pricing in more than a 50% chance of another hike by June. So, between the prospect of tighter monetary policy and looser fiscal policy, the USD is likely to stay buoyant in 2017.

This weekend, the Italian people will be voting on proposed constitutional reforms. These reforms would strip the local government and senate of much of their power and would strengthen the leadership of Prime Minister Matteo Renzi, which would been seen by the market as pro-growth. Matteo Renzi has said he will resign if the proposals are rejected in this weekend’s vote. This could be followed by new elections, which could in turn benefit the Five Star Movement, an anti-euro group led by the former comedian Beppe Grillo.

The Movement is one of many protest parties that have surged in popularity across Europe in recent years. But, behind the politics in Italy there's a background of persistent economic weakness and a more immediate problem in the banking industry not helped by Italy's dismal economic performance as it is roughly the same size as it was at the turn of the century. There are real concerns that a defeat for Mr Renzi's proposals could tip already failing Italian banks to the brink of collapse, or worse.

The Pound surged to an eight week high against the Dollar and near a three month high against the Euro, after the Brexit minister David Davis hinted that the UK would consider making payments to the EU budget in return for access to the EU single market – spurring hopes of a softer Brexit.