Storms ahead but markets hope for trade truce
Expect stormy conditions and the risk of the whole thing
being called off. No, not the Rugby World Cup, but trade talks in the US (and
Brexit…). Investors are still holding grimly to the hope of a trade truce, if
not quite a full-blown deal.
US stocks took a knock at the death amid yet another
source-based report on trade talks, but still managed to rally for the first
time in three sessions. The S&P 500 rose 0.9%, honing back in on the
50-day moving average, but had been as much as 1.3% higher at one
stage. The 50-day line needs to be watched as it will form an important
point of resistance. European markets were also stronger. Shanghai and Tokyo
have firmed overnight. Europe got off to a pretty decent start with
the main bourses in the green as investors pin their hopes on a positive
outcome on trade.
flow around trade talks are sure to keep traders on their toes today as the
discussions in Washington are finally due to commence. At the moment, we
may think that a narrow deal or truce is possible as China wants to avoid the
hike to 30% from the current 25% on tariffs on $250bn of
imports due to take effect Oct 15th. They could essentially fire up
one or two elements of the deal that was being negotiated before the talks
broke down earlier this year. Anything much more than that is just wishful
The US is playing hardball – or at least the administration
is. On top of visa restrictions and adding companies to its blacklist, the
White House is now mulling a crackdown on Chinese contraband. Yet another contentious point
for the delegations to consider. Meanwhile,
it seems every US company is scared stiff of China – now Apple has dropped the
app that Beijing took issue with.
In the last few hours we’ve had a report from SCMP that
low-level preliminary discussions had broken down with no progress. But then
we’ve had a report that the US will start issuing licences to some US companies
to sell goods to Huawei. Usual drill – be ready for a lot of conflicting news flow
and for talks to break down completely.
Minutes from the Federal Reserve’s September policy meeting
showed worries about the economy, with recession indicators elevated since the
July meeting. The minutes said several FOMC members pointed to statistical
models indicating that ‘the likelihood of a recession occurring over the medium
term had increased notably in recent months’. Markets now see an 85% chance of a rate cut at the
end of the month.
All eyes today on the CPI number coming out today, which
has been steadily marching higher over the last three months. FOMC members did
not seem overly bothered about this and indeed were more worried about
importing inflation from Japan and Europe, the minutes indicated.
Gold was up to a week-high overnight at $1517. Oil
keeps sliding around the $52.50 level with little direction. At the moment there doesn’t seem much in the way of a risk premium
from Turkey’s incursion into Northern Syria.
EURUSD is threatening to break out above 1.10 –
again. At send time it had broken the level and made a new high for October
that brings the 1.1020 level initially into focus before we consider 1.10750
and ultimately a return to 1.11. Interesting news that Draghi overruled his
own ECB officials to restart QE. The suggestion is that maybe the new
Lagarde-era ECB will not be so dovish? To be fair, super-loose monetary policy
has run its course – something else needs to be found – you cannot keep cutting
more into negative territory.
Sterling remains sensitive to Brexit news – but GBPUSD
is holding onto 1.220 and at send time was pushing up to 1.2240. As we’ve
detailed already, a break below 1.22 could well see a sharp drop as it’s