Deals Hang By A Thread

Sterling slides as a Brexit deal is said to be “essentially impossible”; markets seek havens as US-China relations sour; Fed minutes are today’s focus.

Previous Day's Market Highlights

Deals can be hard to strike. Just ask those taking part in UK-EU Brexit discussions and US-China trade negotiations; with both sets of talks taking significant backward steps on Tuesday.

Firstly, the chances of a no-deal Brexit appear to have markedly increased, sparked by comments from German Chancellor Merkel that a Brexit deal can only be agreed if Northern Ireland remains inside the Customs Union - something that the present UK government will never agree to. A government spokesman stated that a deal is "essentially impossible" within these parameters; not just now, but ever - raising the chances that PM Johnson pivots towards a no-deal divorce. Meanwhile, technical discussions between UK and EU negotiators were said to be 'close to breaking down', while EU Council President Tusk expressed frustration at the UK, asking the government to stop playing a 'blame game' and state what they want from talks. Despite PM Johnson planning to head to Ireland for last-minute talks later this week aimed at salvaging a deal, hopes of an agreement appear to be fading fast, with the two sides moving further away from common ground. The increasingly likely crescendo for the Brexit process appears to be a late-October Parliamentary showdown between a no-deal exit and revoking Article 50, with the result of such a vote being incredibly difficult to call. For the pound, mounting uncertainties and concerns over a disorderly departure exerted pressure, sending sterling to 1-month lows against both the dollar and euro - settling 0.7% and 0.5% lower respectively.

Across the pond, US-China relations seemed to be deteriorating almost as fast as those between the UK and EU. Expectations of a deal, or truce, being struck this week have been further dampened after additional tit-for-tat escalations. Moves began with the US blacklisting 28 Chinese technology firms over supposed repression of ethnic minorities - a move which immediately prompted Chinese officials to warn investors to "stay tuned for retaliation". Meanwhile, reports surfaced that the Chinese delegation were planning to cut short their stay in the US; while the Trump Administration are rumoured to, once again, be considering limits on investments into Chinese stocks. All of these headlines combined to create a risk-off atmosphere, resulting in a rotation into safe-havens. The dollar added 0.25% against a basket of peers, while the yen and Swiss franc gained ground, and Treasury yields fell. Market participants now have extremely low expectations heading into this week's talks, with the possibility that even a truce to prevent further tariff impositions won't be agreed.

Also of note from the US were comments from Fed Chair Powell, particularly those addressing ongoing financial plumbing issues in funding markets. Powell announced that the Fed would soon announce some sort of permanent open market operations scheme (POMO) in order to increase the supply of reserves by resuming asset purchases. It is important, however, to stress that this is not an easing measure, and is purely aimed at solving technical issues in money markets. On monetary policy, Powell reiterated that the Fed will 'act as appropriate' to sustain the current expansion.

Elsewhere, markets were relatively quiet, with data releases once again thin on the ground. The euro struck a softer tone, dipping 0.2%, likely as a result of the German government dampening hopes of significant fiscal stimulus being enacted. Commodity currencies also struggled, with the Aussie and Kiwi dollars lagging as risk-off sentiment took hold, and the Canadian dollar trading 0.2% lower in an oil-linked move.

Away from FX, diminished risk appetite resulted in steep falls in equity markets. In Europe, the pan-continental Stoxx 600 closed 0.97% lower, while the US benchmark S&P 500 tumbled 1.56%. Asian markets are also lower, overnight. Finally, rising trade tensions exerted pressure on oil prices; global benchmark Brent shed 0.8%, while US WTI crude lost 0.2%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1140 1.1381 1.1111 2.37%
GBP/USD 1.2210 1.2583 1.2195 3.08%
EUR/USD 1.0960 1.1110 1.0879 2.08%
GBP/AUD 1.8125 1.8496 1.7937 3.02%
GBP/NZD 1.9350 2.0003 1.9113 4.45%
GBP/CAD 1.6255 1.6691 1.6191 3.00%

Today's Market Highlights

Today, attention centres on US monetary policy, with markets set to receive both a backwards- and forwards-looking view of the US economy from the Federal Reserve. Firstly, minutes from September's FOMC meeting, released this evening, will be parsed for any signs of further easing being under consideration. Remember, the September meeting saw a divided FOMC cut rates by 25bps, but signal that no further loosening would take place either this year, or next. Investors will also be looking for any further signs of division among FOMC members, while also paying close attention to anecdotal comments on the US economy. However, with the minutes being 3-weeks old, this afternoon's remarks from Fed Chair Powell will likely be of more interest for gauging the Fed's current view of the US economy. Markets currently price a roughly 85% chance of a rate reduction this month, due to soft PMI figures and a lacklustre labour market report. Any dovish comments from Powell, increasing the chances of further easing, will likely be met with a weaker dollar, and an equity market rally.

Turning to economic data, today's calendar is once again sparsely populated. No major releases are due from the eurozone or UK throughout the course of the day, while only tier-three points are expected from the US. This afternoon's JOLTS job openings data and wholesale inventories figures are likely to have little immediate impact on price action, though are useful indicators of broader economic health. Forecasts for both releases can be found below.

As economic data remains limited, investors will likely remain fixated by geopolitical issues - specifically any developments in US-China relations or any Brexit headlines. On the latter, Parliament is now prorogued - legally, this time - until the Queen's Speech on 14th October, hence any headlines will centre around the progress, or lack thereof, in continued UK-EU talks. 

Today's Economic Calendar

Time Currency Release Consensus Previous
15.00pm USD JOLTS Job Openings (Aug) 7.191mln 7.217mln
15.00pm USD Wholesale Inventories (Aug) 0.4% 0.4%
16.00pm USD Fed Chair Powell Speech
19.00pm USD FOMC Meeting Minutes (Sep)