Another Day, Another Twist in the Trade War

Risk appetite takes a hit as expectations of a Sino-US deal wane; Sterling firms as markets bet on a Tory majority, ahead of this evening’s TV debate

Previous Day's Market Highlights

Markets struck a risk-averse tone on Monday, as trade sentiment soured once again. 

It feels as if I've written that sentence countless times before; and will likely have to write it countless times again before a phase one Sino-US deal has been signed.

This latest twist in the trade war was sparked by CNBC reports that Beijing were said to be in a "pessimistic" mood, with China particularly troubled by President Trump's recent comments dampening expectations of existing tariffs being rolled back upon the signing of a deal. Furthermore, the reports indicated that the Chinese are now adopting a 'wait and see' strategy, in light of ongoing impeachment proceedings and the looming 2020 presidential election. 

These comments not only prove that there may be little urgency to strike a deal on the Chinese side, but also dampen any hope of a deal being done over any timeframe, with tariff rollbacks still clearly key to unlocking negotiations. 

For markets, trade pessimism resulted in a rotation towards safe havens, seeing both the Japanese yen and Swiss franc remain well supported - adding around 0.2% apiece. Bonds also saw demand, with Treasuries falling by around 3bps across the curve. Conversely, both antipodeans struggled, though closed close to unchanged against a weaker dollar.

Speaking of the greenback, an impromptu meeting between President Trump and Fed Chair Powell sparked a round of dollar selling. The meeting, which also included Treasury Sec. Mnuchin was called by President Trump, with the topics discussed said (according to Trump) to have included monetary policy, negative interest rates, dollar strength, and trade with China. Oh to have been a fly on the wall during those conversations. 

For markets, the key question is why the two met, and whether any policy actions come as a result of the meeting - though Powell will likely, and rightly, remain independent of the President's desires. Nonetheless, continued murmuring of potential FX intervention from the US Treasury will unnerve market participants, hence the dollar's 0.2% slide on Monday.

As a result of the weaker dollar, the euro gained ground, adding around 0.35%. The common currency was also well-supported by the continued hope that the US' planned imposition of auto tariffs would be postponed. Furthermore, the euro shrugged off comments from a couple of ECB policymakers which indicated that monetary policy has not reached its limits - with investors remaining incredibly sceptical over the ECB's ability, and will, to take rates even deeper into negative territory. 

Meanwhile, in the UK, sterling remained firm, as market participants further priced in the likelihood of a Conservative majority at December's election after weekend opinion polling pointed to a significant, double-digit, poll lead. Sterling added 0.5% against the dollar, hitting a fresh 4-week high just shy of the $1.30 handle. Against the euro, sterling added 0.3%, its 5th gain in 6 trading days, hitting a fresh 6-month high above €1.17.

Overnight, the Aussie dollar has ticked lower, after a dovish set of minutes from the November RBA meeting. Despite interest rates being left on hold earlier this month, policymakers stated in the minutes that a "case could be made" for a November cut, and that the Board are prepared to ease further if needed. These comments, along with last week's poor labour market data, have seen the market increase bets on a rate cut next month.

In other markets, equities traded in mixed fashion, though low trading volumes mean we should read little into the price action. In Europe, the pan-continental Stoxx 600 dipped by 0.15% on trade concerns; while the US benchmark S&P 500 added 0.1%, closing at a fresh all-time high. Finally, oil prices lost ground as a result of ongoing trade and oversupply concerns. Global benchmark Brent settled 1.35% lower, while US WTI crude shed 1.15%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1700 1.1703 1.1550 1.31%
GBP/USD 1.2965 1.2986 1.2761 1.73%
EUR/USD 1.1080 1.1175 1.0989 1.66%
GBP/AUD 1.9055 1.9057 1.8546 2.68%
GBP/NZD 2.0265 2.0331 2.0002 1.62%
GBP/CAD 1.7115 1.7159 1.6724 2.54%

Today's Market Highlights

The general election heads outside of the Westminster bubble and into mainstream circles today, with the first TV debate of the campaign being held this evening. Prime Minister Boris Johnson and opposition leader Jeremy Corbyn will go head-to-head for an hour, in a debate covering both Brexit and other priorities for government. While both leader's Brexit positions are, by now, relatively well-known, other policy areas - particularly policies on tax, public spending, and (in Labour's case) nationalisation - will also be of interest for investors. The latter case, nationalisation, will be of particular interest for equity investors, with companies who may be in the firing line of a Corbyn government likely to see their share prices come under pressure.

Market participants will also pay particular interest to opinion polling after the debate, with the election becoming more 'real' for many voters after the debates begin. Of course, polling can change wildly after such events, and the debates can have a significant bearing on the election result - anyone remember 'Cleggmania' in 2010? Investors will continue to pay close attention to the Conservative's poll lead, with a continued double-digit lead, and high likelihood of a majority come December, likely to see sterling remain well-supported.

This evening's ITV debate isn't the only big election event this week, with the two leaders - as well as Lib Dem leader Jo Swinson, and SNP leader Nicola Sturgeon - appearing on a BBC Question Time Special on Friday evening. Furthermore, manifestos will likely also be launched this week; Labour on Thursday, and the Conservatives on either Friday or Saturday.

Elsewhere today, the economic calendar is once again sparsely populated, meaning that risk sentiment will once again be dominated by US-China trade headlines. 

Of today's releases, this afternoon's US building permits and housing starts figures are perhaps of most interest, with both data points being useful leading indicators of the health of the construction sector; though neither tends to have a significant impact on price action. Elsewhere, this morning's eurozone current account figures are set to once again show a hefty surplus; while, overnight, market participants will get their latest look at Japanese trade data.

Finally, today's central bank speaking calendar is also relatively barren, with only dovish New York Fed President Williams, and BoC Sr. Deputy Governor Wilkins, set to make remarks. Any hints on the policy outlook from either may be of interest to investors.

Today's Economic Calendar

Time Currency Release Consensus Previous
09.00am EUR Current Account (Sep) 24.5bln 26.6bln
13.30pm USD Building Permits (MoM - Oct) 1.385mln 1.391mln
13.30pm USD Housing Starts (MoM - Oct) 1.32mln 1.26mln
20.00pm GBP ITV Leaders Debate - Boris Johnson vs Jeremy Corbyn