Crunch Time for Trade Talks & Brexit Negotiations

Key US-China trade talks begin in Washington DC; last-ditch UK-Ireland Brexit negotiations loom; ECB minutes and US CPI highlight the calendar.

Previous Day's Market Highlights

Markets struck more of a risk-on tone on Wednesday, with sentiment boosted by a series of more positive headlines in the ongoing US-China trade war. Expectations of some kind of agreement or truce at this week's talks, though remaining small, increased amid signs that China were attempting to ease tensions and that relations between the superpowers may be improving. Reports surfaced that China have offered to boost purchases of US agricultural products, namely soybeans, in an attempt to 'reset' relations between the parties. Furthermore, China is said to remain open to a partial trade deal, despite the blacklisting of numerous technology companies, so long as no new tariffs are imposed by the US. The next round of tariff increases, on roughly $260bln worth of Chinese imports, is currently due to go into effect on 15th October. While a deal is by no means a certainty, especially with the Trump Administration seeming to desire a comprehensive trade deal, or nothing, risk appetite notably increased. As a result, both the Aussie and Kiwi dollars gained ground, while safe-havens struggled. The dollar lost around 0.1% against a basket of peers, while the Japanese yen and Swiss franc both shed more than 0.3%.
Also from the US, minutes from September's FOMC meeting showed officials citing both sluggish inflation and management of downside risks as reasons for easing policy. Of more interest, however, were additional signs of division among Committee members, with several policymakers having favoured keeping rates steady, and debate beginning to emerge on when to conclude policy easing. Both the dollar, and markets more broadly, largely shrugged off the slightly stale minutes, which are 3 weeks out of date. Markets also ignored disappointing JOLTS job openings data, showing openings falling to an 18-month low of 7.015mln in August. This adds further evidence to the recent, and likely continued, slowdown in hiring being driven by lesser demand.
Elsewhere, sterling continues to trade as a Brexit barometer, fluctuating in line with shifts in sentiment. The pound experienced a brief pop higher, swiftly adding around 0.5%, in early trading after reports that the EU were considering a time-limited version of the backstop with a veto for Northern Ireland. However, the pound's rally was over almost as quickly as it began, with the EU confirming that it had no plans to make any 'bold, new offers'. In other Brexit news - EU Negotiator Barnier reiterated that the UK's current proposals cannot be accepted by the EU; while the government confirmed that Parliament would sit on Saturday 19th October to discuss the result of this month's EU summit. At the close of trading, sterling settled unchanged against the dollar, and had shed 0.25% against the euro.
Speaking of the euro, the common currency remained within a tight $1.0950 - $1.1000 trading range for the fourth straight day on Wednesday, with no major economic releases or headlines to provide the currency with significant impetus. The euro closed 0.2% higher, towards the top of the aforementioned range, largely as a result of a weaker dollar. The Canadian dollar was similarly rangebound against its US counterpart, ending the day unchanged.
Away from FX, global equity markets gained ground on increased optimism over US-China trade. In Europe, the pan-continental Stoxx 600 closed 0.4% higher, while the US benchmark S&P 500 added 0.91%. Oil markets, however, failed to hold on to trade-linked gains, likely as a result of increasing US stockpiles. Global benchmark Brent settled 0.2% higher, while US WTI crude closed flat.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1125 1.1381 1.1111 2.37%
GBP/USD 1.2275 1.2583 1.2195 3.08%
EUR/USD 1.0990 1.1110 1.0879 2.08%
GBP/AUD 1.8125 1.8496 1.7937 3.02%
GBP/NZD 1.9365 2.0003 1.9113 4.45%
GBP/CAD 1.6280 1.6691 1.6191 3.00%

Today's Market Highlights

Geopolitical issues will remain front and centre today, with the 13th round of US-China trade talks set to get underway in Washington DC, and PM Johnson set to meet Irish Taoiseach Varadkar for 'last-ditch' Brexit talks. On trade, progress reports from the talks will be a key driver of risk appetite, with signs of cooling tensions set to benefit risk assets, and frostier relations set to result in a rotation into safe-havens. Going into the talks, market expectations appear relatively low, but the situation remains fast-moving and unpredictable, thus likely to result in significant volatility.
Meanwhile, back in the UK, talks between Johnson and Varadkar are seen as the last chance saloon for a Brexit deal to be agreed ahead of next week's all-important EU Summit. The Prime Minister is likely to once again present the '2 borders for 4 years' plan to replace the Irish backstop, however it would appear that Varadkar requires significant changes to the plan in order to agree an orderly Brexit. The direction of the pound will heavily depend on the result of the discussions, with failure to make a breakthrough today likely to result in the government pivoting towards a no-deal departure. Interestingly, the discussions are being held in an undisclosed location, with no media access, thus market participants will have to rely on leaked stories and rumours, resulting in increased potential for confusion and volatility.
On the data front, the calendar is busy. This morning sees the release of August's monthly GDP data from the UK, set to show the economy stagnating on an MoM basis, down from July's growth of 0.3%. Nonetheless, the UK economy should avoid dipping into a technical recession in Q3, largely due to pre-Brexit stockpiling, reflected in the consensus estimate for the rolling 3-month average, at 0.1%. Also due this morning are minutes from the ECB's September policy meeting, which market participants will examine for further signs of division among the Governing Council, as well as signs of additional stimulus on the horizon. 
Major releases continue throughout the afternoon session, with the US calendar highlight being September's CPI figures. The pace of price increases is expected to continue to heat up, with headline CPI expected at 1.8% YoY, and core CPI expected to remain at 2.4% YoY. Nonetheless, risks to the forecasts appear biased to the downside as a result of softer than expected producer price inflation figures earlier in the week. Assuming that inflation continues to rise, Federal Reserve policymakers, who are likely to loosen policy further this month, will be left with a conundrum; namely, how much additional easing can be delivered, with inflation beginning to rise. Also due from the US this afternoon will be weekly jobless claims, expected modestly above the 4-week average of 213k, along with 4-week and 30-year Treasury auctions.
Turning to central bank speakers, BoE Governor Carney highlights the calendar, though is highly unlikely to make any significant remarks on monetary policy at the unveiling of the new £20 note in Margate this morning. From the Fed, markets will hear from three non-voters; über-dovish Minneapolis Fed President Kashkari, hawkish Cleveland Fed President Mester and centrist Atlanta Fed President Bostic. Finally, from the ECB, dovish Chief Economist Philip Lane will likely repeat policymakers' push for fiscal stimulus from euro area governments.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP GDP (MoM - Aug) 0.0% 0.3%
10.20am GBP BoE Gov. Carney Speech
12.30pm EUR ECB Meeting Minutes (Sep)
13.30pm USD CPI (YoY - Sep) 1.8% 1.7%
13.30pm USD Core CPI (YoY - Sep) 2.4% 2.4%
13.30pm USD Initial Jobless Claims (Oct 4) 219k 219k