Pathway to a Deal

Sterling surges after ‘positive’ UK-Ireland talks; risk assets are buoyed by hopes of a US-China trade deal; geopolitics to remain in focus today

Previous Day's Market Highlights

Sterling experienced its biggest 1-day gain in 7 months on Thursday, as markets moved to dramatically reprice the chances of a Brexit deal after a 'positive and promising' meeting between Prime Minister Johnson and Irish Taoiseach Varadkar. Reports from the discussions indicated that the two leaders could see a 'pathway to a possible deal', while reiterating that both sides involved in the negotiations would like to reach an agreement next week. Furthermore, and indicative of a significant shift in sentiment, today's developments were said to be sufficient to allow negotiations to resume in Brussels. This is somewhat of an about-turn from the EU, having indicated that PM Johnson's previous proposals were unworkable, with the development rumoured to be due to 'very significant' movement on customs from the UK side. While this is promising in terms of UK-EU discussions, customs concessions may dent the chances of a potential deal passing through the Commons; though this is a bridge that will need to be crossed once, and if, an agreement is reached.
For the pound, the improvement in sentiment, and increased chances of an orderly Brexit, resulted in significant gains. Sterling added a shade under 2% against the dollar, the biggest jump since March, settling well above the $1.24 handle. The pound performed similarly well against the euro, adding 1.7% to hit a 2-week high. A note of caution, however, that the pound has travelled a long way to the upside in a short period of time, and remains vulnerable to a reversal on the next headline or shift in sentiment.
Meanwhile, markets broadly struck a risk-on tone, buoyed by further signs of improving US-China relations, possibly leading to the agreement of a 'mini-deal' or further trade truce this week. Chinese Vice Premier Liu He indicated that he is willing to reach an agreement on matters that both sides care strongly about, and to prevent friction stemming from further escalation in tensions. Shortly after, President Trump teased a deal, tweeting 'they want a deal, but do I?' and announcing a meeting with the Vice Premier would be held today. The improved tone, and higher chances of a deal, resulted in investors continuing to rotate away from safe-havens and into riskier assets. As a consequence, the dollar shed 0.45% against a basket of peers, while the Japanese yen lost 0.7% and the Swiss franc shed a shade under 0.5%. On the other hand, both antipodeans benefitted, adding 0.5% apiece.
Moving away from geopolitics for a moment, Thursday's economic calendar saw a number of important releases. August's GDP figures from the UK showed the economy shrinking by 0.1% MoM, however, the UK should avoid a technical recession in the third quarter as a result of increased pre-Brexit stockpiling, as indicated by the rolling 3-month average printing 0.3%. Elsewhere, minutes from the ECB's September policy meeting showed Governing Council members deeply divided over the resumption of asset purchases and the decision to cut interest rates. The euro largely ignored the minutes, with divisions already well-publicised, trading around 0.2% higher over the course of the day.
Thursday's other major release came from the US, with September's CPI report coming in softer than expected. Headline CPI increased at 1.7% YoY, unchanged from August's pace, though was flat on a MoM basis; meanwhile core CPI remained at 2.4% YoY, and slid to 0.1% MoM. These softer than expected prints, and signs of softness in inflation going forward, solidify the case for the Fed announcing another 25bps rate cut this month, with the market currently pricing an 80% chance of such an outcome.
Away from FX, global equity markets rallied as trade optimism took hold. In Europe, the pan-continental Stoxx 600 closed 0.8% higher; while the US benchmark S&P 500 gained 0.65%. Finally, oil prices struck a firmer tone after indications that OPEC were possibly considering further supply cuts in December. Global benchmark Brent settled 1.5% higher, while US WTI crude gained 1.8%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1305 1.1381 1.1086 2.59%
GBP/USD 1.2455 1.2583 1.2195 3.08%
EUR/USD 1.1015 1.1067 1.0879 1.70%
GBP/AUD 1.8375 1.8496 1.8076 2.27%
GBP/NZD 1.9700 2.0003 1.9311 3.46%
GBP/CAD 1.6545 1.6691 1.6191 3.00%

Today's Market Highlights

Geopolitical issues will remain front and centre today, with both Brexit and US-China trade negotiations continuing. Regarding the former, Brexit Secretary Barclay will, this morning, head for talks with EU Negotiator Barnier over breakfast in Brussels. Market participants will be looking for the positive tone from yesterday's UK-Ireland talks to be maintained, with a possibility that discussions enter the 'tunnel' -- a period of intensive, secret talks between a small number of officials to finalise a deal. The direction of the pound will hinge on these discussions, in addition to today's discussions between Barnier and Varadkar.
Meanwhile, turning to trade, US-China discussions will enter their second day today, with market participants focusing on this afternoon's planned meeting between Chinese Vice Premier Liu He and President Trump at the White House. As mentioned above, expectations of a deal have markedly increased, and the progress in today's talks will be the key driver of risk appetite over the course of the coming day.
On the data front, a couple of major releases are due. From the US, preliminary consumer sentiment figures from the University of Michigan are expected to show consumers becoming a tad more pessimistic this month, with the index set to fall to 92.0, a sign of potentially slower consumer spending in the coming months. Meanwhile, from Canada, September's labour market report will be in focus. Unemployment is set to have held steady at 5.7%, while net employment is expected to have increased by 10k -- though the latter indicator is something of a random number generator and a rather unreliable data series. Average earnings and the participation rate will also be eyed for further signs of tightness in the labour market.
Turning to central bank speakers, today's calendar is relatively busy, with remarks from ECB President Draghi the highlight. Draghi, now coming to the end of his term at the helm of the ECB, will likely reiterate the need for fiscal stimulus from eurozone governments should he make any policy comments. Remarks from dovish ECB members de Guindos and de Cos will also be in focus. Meanwhile, markets will also hear from FOMC hawk Rosengren, in addition to über-dove Kashkari and centrist non-voter Kaplan.
Looking ahead to next week, the data calendar remains busy, while focus will also remain on geopolitical issues. From the UK, attention will centre on Brexit developments going into the crunch EU summit, while investors will also glance over August's labour market report, as well as September's CPI and retail sales figures. Elsewhere, retail sales figures from the US will provide a useful indication of consumer health, while minutes from the RBA's latest policy meeting will be eyed for signs of further policy easing.

Today's Economic Calendar

Time Currency Release Consensus Previous
13.30pm CAD Net Change in Employment (Sep) 10.0k 81.8k
13.30pm CAD Unemployment Rate (Sep) 5.7% 5.7%
15.00pm USD Prelim. University of Michigan Consumer Sentiment (Oct) 92.0 93.2