Previous Day's Market Highlights
Volatility returned to financial markets last week, culminating on Friday with the US and China agreeing a mini trade deal, and the chances of a Brexit deal continuing to increase. Below, I shall summarise the key developments and impacts on markets:
The UK's divorce from the EU has taken several twists and turns over the past seven days. After the week began on a dour note, with a deal said to be "essentially impossible", talks have now entered the intensive 'tunnel' phase after reported compromises from both the UK and Ireland over a replacement for the controversial backstop. This stage of talks involves detailed, intense discussions between a small number of negotiators from both sides, aimed at thrashing out the final parts of a deal ahead of next week’s EU Council Summit. This latest development has seen the expectations of a deal being agreed, and an orderly Brexit taking place, surge even higher; though it is important to note that the specifics of the new proposals remain unknown and passing the deal in Parliament will be challenging. Going forward, the less that is heard from these talks, the better. With tunnel negotiations designed to be confidential and secret, frequent leaks from the discussions would likely signify that talks are not progressing well, thus representing a lower chance of a deal being agreed.
For markets, the increasing chances of a Brexit deal resulted in significant sterling upside, for a second consecutive day. On Friday alone, the pound gained more than 1.7% against the dollar, briefly rising above the $1.27 handle for the first time since late-June. Sterling’s strong performance into the end of the week, a gain of 3.6% over the last two trading days, represents the best 2-day gain for the pound since the middle of 2008. Similar gains were recorded against the common currency, with the pound hitting a 5-month high at €1.1500, up 1.3% on the day.
Over the weekend, talks between the UK and EU continued at a technical level, with discussions described as “constructive”, though some considerable distance remains between the two parties. Furthermore, reports from the FT indicated that the UK’s new proposals are yet to be properly worked out, with some EU diplomats reportedly seeing Monday’s discussions being seen as “one last chance” to reach an agreement.
At last, we have a US-China trade deal. Only it's not yet in writing; hasn't yet been signed; and is only phase one of the negotiations. In fact, Friday’s announcement was the bare minimum that the market had been expecting after two days of intense negotiations between the superpowers. The mini-deal covers intellectual property, financial services and contains a promise of ‘big’ Chinese purchases of US agricultural products, in addition to covering FX issues and currency manipulation. It was also announced that a planned tariff increase on October 15th would not go ahead, though, crucially, December’s planned tariff increase has not yet been scrapped by the Trump Administration, indicating that tensions between the nations are likely to linger.
Anticipation of a deal being agreed helped to support risk appetite throughout the majority of the day on Friday, though the reaction to the deal’s announcement was one of ‘buy the rumour, sell the fact’ as earlier trends reversed. Nonetheless, the dollar settled 0.4% lower against a basket of peers, with the Japanese yen and Swiss franc also pressured by the risk-on feel. Conversely, both the Aussie and Kiwi dollars gained ground, though retraced slightly after the announcement. Equity markets also pared earlier gains, as the benchmark S&P 500 closed 1.1% higher. The pan-European Stoxx 600 closed 2.3% higher, before the trade deal announcement.
While US monetary policy remains at the forefront of many minds, with a rate cut this month a better than even chance, focus was on the Fed’s balance sheet on Friday. Recent hiccups in funding markets have had a detrimental impact on the transmission of monetary policy, with the Fed effectively losing control of short-term interest rates and the ability to implement their desired policies. Therefore, in an attempt to address this, the Fed announced plans to purchase $60bln worth of Treasury bills per month until at least Q2 2020, in an attempt to improve liquidity and increase excess reserves present in the market. It must, however, be stressed that this is not quantitative easing, with central banks' balance sheets naturally expanding over time as demand for cash rises over time as an economy expands. Nonetheless, the move will likely provide support to risk assets in the near-term.
Any Other Business
- Canadian labour market figures surprised to the upside, as unemployment fell to a 3-month low and the economy added 54,000 jobs in September. The loonie gained 0.7% in reaction
- US consumer sentiment unexpectedly increased, with the University of Michigan gauge reading 96.0 in October, in line with the 3-month average
- Oil prices surged on Friday after two Iranian tankers were attacked in the Red Sea. Global benchmark Brent settled 2.4% higher, while US WTI crude gained 2.2%
|Currency Pairing||08:00 Today||Vs 08:00 Yesterday||Four-Week High||Four-Week Low||% Change|
Today's Market Highlights
A fresh trading week begins with geopolitical issues remaining in focus, though volatility may be muted amid thinner liquidity owing to today’s public holidays in the US and Canada. While markets will continue looking for more detail on Friday’s US-China trade accord, Brexit is likely to take centre stage. Market participants will continue to focus on ongoing UK-EU discussions, and whether the ‘tunnel’ phase yields a positive conclusion ahead of the beginning of the EU Council Summit on Thursday. Also in focus will be this morning’s State Opening of Parliament, with the Queen’s Speech set to outline the Government’s legislative plans for the coming Parliamentary session. Keen attention will be paid to the speech, with the planned legislation likely to form the nucleus of the Conservative Party manifesto at a likely winter general election. The direction of the pound will continue to depend on shifts in Brexit sentiment, with sterling edging towards overbought territory after last week’s surge.
Meanwhile, monetary policy will also be in focus, with remarks from BoE Deputy Governor Cunliffe, as well as the ECB’s de Guindos and de Cos, set to be closely watched for any hints on the policy outlook. Overnight, minutes from the Reserve Bank of Australia’s latest meeting, where a 25bps rate cut was announced, will be parsed for signs of further loosening being imminent, as well as whether any unconventional policies (such as QE) are under consideration.
Looking ahead to the remainder of the week, by far the most important event will be the EU Summit, set to take place on Thursday and Friday. This summit is set to be the climax of the Brexit process, with PM Johnson having to agree an exit deal with the EU27 leaders to avoid, by law, having to request another Article 50 extension - though the Prime Minister continues to state that the UK will be leaving, deal or no deal, on 31st October. After the summit, Parliament will be sitting on Saturday – for the first time since the Falklands War – to debate the latest developments and then vote on either leaving with a deal, or leaving without an agreement. Either way, the run up to, and fallout from, the EU Summit will be crucial in the Brexit process. The importance of this week for the pound cannot be overstated.
On the data front, releases come thick and fast, the highlight being CPI inflation prints from the UK, eurozone, Canada, New Zealand and Japan. Meanwhile, labour market reports are due from both the UK and Australia, while retail sales figures from the UK and US will be eyed as markets continue to try and gauge the health of the consumer. Finally, this week sees third quarter earnings season begin in the US, with banks kicking things off. Expectations are for earnings to decline for a third consecutive quarter, likely to once again raise concerns about the health of the economy.
Today's Economic Calendar
|10.00am||EUR||Industrial Production (MoM - Aug)||0.3%||-0.4%|
|Approx. 11.25am||GBP||State Opening of Parliament (inc. Queen's Speech)|
|01:30am (Tues)||AUD||RBA Meeting Minutes (Oct)|