Geopolitical Optimism Turns To Gloom

Markets seek a haven as trade uncertainty continues; sterling is dragged lower by lingering Brexit concerns; Q3 earnings

Previous Day's Market Highlights

A fresh trading week began with markets continuing to be dominated by the same, all-too-familiar, themes on Monday; namely US-China trade relations and the UK's ongoing divorce from the EU.
On trade, having initially been underwhelmed by the agreement of a 'mini' trade deal on Friday, investors became increasingly concerned about the stability of the agreement on Monday, with reports that China wanted further negotiations to take place before signing the deal. China reportedly feel that the deal is not balanced, with an understandable desire for December's planned tariff hike to be scrapped, and the legal text of the deal to be nailed down, before President Xi approves the agreement. This increased scepticism towards last week's 'handshake' deal, and the potential reigniting of trade tensions, resulted in a continued rotation towards safe-havens. The dollar saw demand, adding just under 0.2% against a basket of peers, while the Japanese yen and Swiss franc were also well-supported -- trading in the Treasury market was closed for Columbus Day. Conversely, both antipodeans struggled, with the Aussie and Kiwi dollars shedding 0.15% and 0.3% respectively. Only time will tell whether this latest development is part of President Trump's Art of the Deal; or whether Friday's agreement will be the greatest trade deal that never happened. One thing is for sure, however -- tensions between the superpowers will continue for some time to come.
Meanwhile, the UK's divorce from the EU rumbles on, with Friday's euphoria over a possible new Brexit deal being replaced with a healthy dose of realism on Monday. Technical discussions between the UK and EU continue, however expectations of an imminent breakthrough have been somewhat dampened by reports that the UK's proposals are 'fiendishly complex' and that the relatively slow pace of negotiations may jeopardise the chances of a deal being agreed ahead of Thursday's EU Summit. These headlines combined to exert pressure on the pound, which shed as much as 1% against both the dollar and euro, before paring some losses. Sterling settled 0.6% lower against the dollar, and around 0.4% lower against the euro, with support at $1.2515 and €1.1350 holding firm. The Queen's Speech was largely a non-event for markets, with the address being seen by many as the nucleus of the Tory Party manifesto for the likely upcoming general election; with many of the Bills announced unlikely to see the light of day until after such a poll.
Elsewhere, markets were relatively quiet, with little in the way of major economic releases. The euro trod water, ignoring slightly better than expected industrial production figures, which showed production increasing by 0.4% MoM in August. Nonetheless, the eurozone economy is by no means out of the woods, with ongoing trade tensions and lingering uncertainty set to cast a shadow over the bloc's economic activity. Monday's only other notable mover was the Canadian dollar, which dipped 0.25% as a result of softer oil prices.
Away from FX, global equity markets suffered as trade jitters took hold. In Europe, the pan-continental Stoxx 600 closed 0.5% lower; while the US benchmark S&P 500 shed 0.15%. Oil prices also fell as a result of renewed trade concerns - both global benchmark Brent and US WTI crude settled around 2% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1450 1.1500 1.1086 3.60%
GBP/USD 1.2630 1.2707 1.2195 4.03%
EUR/USD 1.1030 1.1062 1.0879 1.65%
GBP/AUD 1.8645 1.8715 1.8076 3.41%
GBP/NZD 2.0060 2.0129 1.9311 4.06%
GBP/CAD 1.6705 1.6819 1.6191 3.73%

Today's Market Highlights

Geopolitical issues are set to continue dominating today; with investors continuing to pay close attention to ongoing Brexit talks and US-China trade relations. On Brexit, technical level talks are set to continue, though time remains tight for a deal to be agreed before the Wednesday evening deadline in advance of the EU Summit. Meanwhile, market participants will continue to look for further clarity in the state of US-China relations, particularly whether the two superpowers will be able to agree a truce to prevent the imposition of further tariffs and avoid additional tit-for-tat escalation in the trade war.
Turning to economic data, today's calendar sees a number of important data releases. From the UK, August's labour market data is due, though the market impact will likely be muted in light of ongoing Brexit uncertainties. The jobs market is expected to remain tight, with unemployment expected to hold at a 44-year low of 3.8%, and earnings expected to increase at a healthy clip of 3.9%, just shy of July's post-crisis high. Claimant count figures for September are also due.
Elsewhere, sentiment surveys from the ZEW economic institute will be closely watched as concerns linger over the health of the eurozone economy. Eurozone economic sentiment is expected to fall to the lowest level since August, at -33.0, while the German sentiment gauge is also set to remain deeply in pessimistic territory. Both readings are set to emphasise the need for fiscal stimulus to turnaround the euro area's economic fortunes. Today's only other notable release comes overnight, from New Zealand, in the shape of Q3's CPI figures. Prices are expected to have increased at just 1.4% YoY, well-below the RBNZ's target rate, meaning a rate cut next month remains likely.
Turning to monetary policy, the central bank speaking calendar is busy. From the Bank of England, Governor Carney will be testifying to MPs on fiscal stability, though any policy remarks may be of interest. Remarks from external BoE MPC member Vlieghe will also be watched. Across the pond, a number of regional Fed Presidents are set to make comments, with markets continuing to price in a further 25bps rate cut later this month. Primary focus will likely fall on voting FOMC members George and Bullard, who sit at opposite ends of the hawk-dove spectrum respectively, while non-voters Daly and Bostic are also scheduled to speak.
Finally, third quarter earnings season unofficially kicks off in the US today, with banks leading the way. Expectations are for a third straight quarter of earnings declines, while today's announcements from JPMorgan, Citi, Goldman Sachs and Wells Fargo will be closely watched for the detrimental impacts of the current low rate environment on net interest margins. Earnings are of interest as they can provide a useful barometer of economic health; increasing earnings being a sign of an economic upturn, and falling earnings being symptomatic of a softening in economic activity.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Unemployment Rate (Aug) 3.8% 3.8%
9.30am GBP Average Earnings - Inc. Bonus (3MoY - Aug) 3.9% 4.0%
10.00am EUR Germany ZEW Survey - Economic Sentiment (Oct) -27.3 -22.5
10.00am EUR Euro Area ZEW Survey - Economic Sentiment (Oct) -33.0 -22.4
22.45pm NZD CPI (YoY - Q3) 1.4% 1.7%