Trade jaw jaw, another Boris defeat buoys sterling

Morning Note

Positive news on trade sent a rocket under equities globally and supported risk appetite, but we need to be cautious. US futures shot higher on the news and now we look towards a possible breakout for the S&P 500 following this announcement. It’s been building for a while – if this doesn’t last and the rally fades it would be a bearish signal (see below chart). SPX finished 1% higher yesterday at 2937.  

On trade – we’re getting more jaw jaw, but just as much war war as before. The news of face-to-face high-level talks between the US and China next month has been seen as a positive but needs to be taken with a good dose of salt. It wasn’t that long ago the market was rallying as we thought a deal imminent, now it’s moving on nothing more than confirmation of talks.  It highlights the headline risk that traders must contend with and suggests there is very little by way of a strong trend in the markets right now, just a lot of short-termism and uncertainty. A trade deal is a long way away.

European markets are firmly higher on trade optimism. Asia was broadly higher as it responded to better news on trade, Hong Kong and the lead from Wall St yesterday. 

Despite the ‘positive’ trade news, German factory orders betray the kind of softness we are dealing with. Factory orders came in at -2.5% versus -1.4% expected.

On Brexit, Boris Johnson lost in his attempt to force an election but can still get his way – remember his goal is not Brexit deal or no-deal per se, but power. And to have power you need a Commons majority.  He wants the election. Labours position is so disingenuous – for two years they call for an election and now they run away.  

There are a couple of ways we still get to an election in mid-Oct. Once this bill receives Royal Assent we could see the Opposition agree to an election. This would still be falling into the trap but at least they’d have the legislation in place. It would appear right now that Labour is prepared for this following the late-night deal in the Lords to ensure the bill passes through the upper chamber in time. If this doesn’t happen the government could have introduce a bill on having an election that requires a simple majority in the House. 

Sterling has been buoyed by Boris’s suffering, but event risk remains high. GBPUSD has pushed to a week high but ran into resistance at 1.2260. The pullback needs to find support around the round number 1.22 level and then retest 1.2260 to suggest there is sustainability. Bulls’ big target is the late August swing high at 1.230. Bears will look for the area around 1.2150 to be taken out on the downside. Elsewhere the dollar has held lower on stronger risk appreciate, trade optimism. EURUSD has held its head above 1.10. 

Commodities

Oil – moving with risk – held in check by top trend line resistance of the triangle formation that’s apparently nearing completion. Oil inventories today provide the main risk – a day late this week due to the Labor Day hols. 

Gold has benefitted from dollar softness whilst the yield outlook remains highly supportive. Prices moved through the $1550 resistance towards $1560 but have pared gains and retreated to just below $1547 at send time. Bulls will look for rescaling of $1550, whilst bears may consider the rising trend support line at $1543 and then the previous swing low around the $1535 level. 

Chart of the day: US equities to break out?