Mixed Messages Keep Markets Guessing on Trade

Sentiment volatile as trade deal hangs in the balance; ECB President Lagarde to make first speech; Inaugural UK flash PMIs due; packed calendar ahead

Previous Day's Market Highlights

Sino-US trade relations continued to dominate on Thursday, with markets going from risk-off, to risk-on, then back to risk-off several times throughout the day after a melange of messages from both sides of the trade war.

Markets begun the day striking a relatively positive tone, after some upbeat-sounding noises from a couple of Chinese officials. Vice Premier Liu He - who also happens to be the Chief Trade Negotiator - was said to be "cautiously optimistic" over the prospects for a trade deal, while the Chinese Ministry of Commerce released a statement outlining how officials were 'striving to reach a phase one deal'. As such, when London markets opened, risk appetite was healthy, seeing the Aussie and Kiwi dollars trade close to daily highs, and equities strike a relatively firm tone.

The risk environment became yet healthier after Chinese reports that the US postpone the planned imposition of further retaliatory tariffs on 15th December if a trade deal hasn't been reached. If it occurs, this would likely be an attempt by the Trump Administration to prolong the present economic expansion - which is being underpinned by consumer spending on the goods that would be targeted by the new tariffs - rather than being some kind of grand gesture to the Chinese side.

The shot in the arm that these, unconfirmed, reports gave risk appetite was, however, short-lived. China appear to be becoming increasingly irritated at the US Congress passing a Bill in support of protests in Hong Kong - an action that China sees as intervening in its own internal affairs. Reports from Chinese state media that President Trump signing the Bill into law would be a 'barrier to a trade deal' dented risk appetite, and saw markets reverse course during afternoon trading.

As such, most majors settled relatively close to their opening levels, despite the choppy trading conditions. The dollar was the best of the bunch, closing 0.1% higher against a basket of peers, while the haven Japanese yen was also well-supported. Conversely, antipodeans struggled, with both the Aussie and Kiwi dollars shedding 0.2%.

Looking more broadly, it is concerning that the US and China continue to struggle to reach agreement over the easier parts of a trade deal. Markets appear to hope that the phase one deal will lead onto something bigger, however the two sides are unlikely to successfully tackle more challenging issues - such as intellectual property - if they can't even agree on the simple things now. As such, risk sentiment may be on shaky ground in the coming months, especially if the present impasse over a phase one deal continues. 

Elsewhere, sterling traded within now-familiar ranges, largely ignoring the Labour Party's manifesto launch. The manifesto, branded as a "manifesto of hope", saw a host of radical policies announced, including; a windfall tax on oil and gas companies; the re-nationalisation of rail, mail, energy and water companies; higher tax for those earning more than £80,000 p.a; and a pledge to renegotiate a Brexit deal within 3 months, before holding a 2nd referendum within 6 months of a Labour government taking office.

While the manifesto, which appears much more radical than the one released for the 2017 election, was ignored by markets today, the broader impact will be in focus. Labour will be hoping that the manifesto launch will kick-start their campaign, and see the party begin to eat into the Conservative's double-digit poll lead. If there is no evident bounce in the polls from the manifesto, time would appear to be rapidly running out to find a catalyst to make a campaign breakthrough and narrow the gap.

Meanwhile, the euro was flat -- yet again - ignoring minutes from the ECB's October meeting, which gave no significant fresh information. In fact, watching EUR/USD has been like watching paint dry all year, and today was no different. With just over 1 month of 2019 to go, the pair is on track for its narrowest annual trading range since the inception of the common currency. Perhaps things have got too quiet?

In contrast to the common currency, the Canadian dollar spiked higher on Thursday after more hawkish than expected comments from BoC Governor Poloz. Poloz indicated that monetary conditions are 'about right' and that the economy is in a 'good place overall', seeing market participants roll back some bets on a loosening of monetary policy. The loonie ended the day 0.25% higher, back under the $1.33 handle.

Away from FX, trade war concerns weighed on equity markets on both sides of the pond. In Europe, the pan-continental Stoxx 600 shed 0.4%, while the US benchmark S&P 500 closed 0.15% lower. Meanwhile, in oil markets, prices surged for a 2nd straight day, with support stemming from reports that OPEC+ plan to extend current production cuts until June 2020. Global benchmark Brent settled 2.5% higher, while US WTI crude jumped 2.8%, settling at a 2-month high of $58.58bbl.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1675 1.1735 1.1550 1.58%
GBP/USD 1.2925 1.2986 1.2761 1.73%
EUR/USD 1.1070 1.1175 1.0989 1.66%
GBP/AUD 1.9045 1.9080 1.8546 2.80%
GBP/NZD 2.0165 2.0331 2.0002 1.62%
GBP/CAD 1.7165 1.7270 1.6724 3.16%

Today's Market Highlights

What's been another busy trading week wraps up with a packed data calendar - including two 'firsts' - though developments in US-China trade relations will remain the primary driver of sentiment and risk appetite into the weekend.

The first 'first' of the day comes from Frankfurt, with ECB President Lagarde set to deliver her first policy speech this morning. Investors will pay close attention to Lagarde's policy stance, expected to be as dovish as, if not more dovish than, Draghi, as well as any hints that interest rates may be taken deeper into negative territory under her stewardship of the Bank. Market participants will also be listening for any remarks on fiscal stimulus, with Lagarde likely to attempt to use her political nous and powers of persuasion to get eurozone governments to loosen the purse strings.

The second inaugural event of the day comes from the UK, with Markit set to release the first ever set of flash PMI data for the UK economy (believe me, this is very exciting for us analysts). The data, which is released around a week ahead of the final data, will give a real-time health check on both the manufacturing and services sectors. The report, due this morning, is expected to show the manufacturing industry edging deeper into contraction, with the PMI expected at 49.0. Meanwhile, the services sector is set to have stagnated, with the PMI expected at 50.0 - bang in line with the boundary between expansion and contraction. 

For the pound, signs of softness in the economy will likely exert pressure, especially with the BoE sounding a more cautious tone at their last policy decision. However, attention will also be on this evening's Question Time Leaders Special, with Boris Johnson, Jeremy Corbyn, Jo Swinson, and Nicola Sturgeon all set to appear. Furthermore, weekend policy announcements and opinion polling will be in focus, particularly if there are significant changes in the Conservatives' lead.

Elsewhere, today also sees the release of flash PMI figures from the eurozone, set to show economic momentum remaining fragile. The manufacturing sector is set to have contracted for a 10th straight month, while the services sector is expected to have modestly expanded, the PMI expected at 52.5. 

Across the pond, this afternoon's highlight will be final US consumer sentiment figures, expected to remain at a relatively healthy level of 95.7. Solid consumer sentiment remains key for the US economy, with consumer spending the primary factor underpinning GDP growth. Canadian retail sales data, referencing September, is also due today.

Looking ahead to next week, the calendar remains relatively light, ensuring that the omnipresent issues of the trade war and general election will remain in focus. Of the data, US consumer confidence and flash eurozone CPI are the highlights, while any revisions to 3rd quarter US GDP will also be in focus. Finally, next Thursday is Thanksgiving, therefore US markets will be closed, and liquidity thinned significantly.

Today's Economic Calendar

Time Currency Release Consensus Previous
8.30am EUR ECB President Lagarde Speech
9.00am EUR Flash Manufacturing PMI (Nov) 46.4 45.9
9.00am EUR Flash Services PMI (Nov) 52.5 52.5
9.30am GBP Flash Manufacturing PMI (Nov) 49.0 49.6
9.30am GBP Flash Services PMI (Nov) 50.0 50.0
13.30pm CAD Retail Sales (MoM - Sep) -0.1% -0.1%
13.30pm CAD Retail Sales ex Autos (MoM - Sep) 0.1% -0.2%
15.00pm USD Final University of Michigan Consumer Sentiment (Nov) 95.7 95.7
19.00pm GBP BBC Question Time - Leaders Special