Trade Deal Doubts Escalate

Trade sentiment sours again as phase 1 deal looks in doubt; Labour party to launch manifesto; FOMC minutes give nothing new; ECB minutes due today

Previous Day's Market Highlights

It proved to be a worrisome Wednesday for financial markets, with Sino-US trade sentiment souring once again.

Expectations of a phase one agreement between the two superpowers have been dampened by a number of factors over the past 24 hours, including; the Senate passing a Bill supporting protestors in Hong Kong; Chinese state media reporting that few people believe a deal can be reached soon, and that any such deal would be of limited significance; reports from Reuters that a phase one deal may not be done this year; and comments from President Trump that he doesn't think China is 'stepping up to the level' in trade talks.

If relations continue to proceed on their current trajectory, it seems that the US and China will be moving further apart in negotiations, rather than closing in on common ground. This is despite President Trump's continued insistence that China 'want a deal', with all evidence currently pointing to exactly the opposite. Namely, that Trump wants a deal done before the 2020 election, and that China are happy to wait and sign an agreement on their terms. This is, therefore, likely to lead to prolonged uncertainty, unnerving many investors.

As a result, safe-haven FX remained well supported throughout the day, with the Japanese yen and Swiss franc both extending their gains after the Reuters headline broke. The dollar also caught a bid, ending the day 0.2% higher against a basket of peers, while Treasury yields fell by around 5bps across the curve.

Conversely, both antipodeans encountered stiff headwinds, due to both their status as risk proxies, and the countries' close trading links with China. The Australian dollar ended the day 0.5% lower, while the Kiwi dollar shed 0.4%.

Meanwhile, minutes from the October FOMC meeting gave nothing in the way of fresh information, proving to be merely a repetition of comments from a host of regional Fed Presidents that have been made since the decision. The minutes reaffirmed that most officials saw rates as 'well calibrated' after October's rate cut, while also judging the current level to be appropriate, barring a 'material reassessment' of the outlook. This is nothing new, with policy now firmly on hold, hence caused little reaction in financial markets. 

In the UK, sterling remained confined to a relatively tight trading range, as investors continued to digest election headlines and Tuesday evening's dead heat of a TV debate. Wednesday saw a couple of fresh policy announcements, namely Boris Johnson's plans to raise the national insurance threshold to £12,000 - a yearly saving of roughly £500 for each taxpayer - as well as Liberal Democrat Leader Jo Swinson's announcement of a £50bn 'remain bonus' should her party win a majority and, in her own words, "stop Brexit". The pound ended the day unchanged against both the dollar and euro.

Wednesday's only notable data release came from Canada, in the form of October's CPI figures. The report showed both headline and core inflation remaining at 1.9% YoY for the third consecutive month, giving the BoC little to worry about on that front. The policy outlook, however, hinges largely on developments in the global economy, hence a more cautious stance cannot be ruled out over the coming months. The loonie ended the day 0.3% lower, ignoring the significant jump in oil prices, instead taking a lead from the risk-off tone.

Away from FX, escalating trade concerns pressured equity markets, though losses were relatively well-contained. In Europe, the pan-continental Stoxx 600 closed 0.35% lower, while the US benchmark S&P 500 shed just under 0.4%. Finally, oil prices gained ground after data showed a smaller than expected draw on US inventories. Global benchmark Brent settled 2.5% higher, while US WTI crude added 3%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1670 1.1735 1.1550 1.58%
GBP/USD 1.2925 1.2986 1.2761 1.73%
EUR/USD 1.1075 1.1175 1.0989 1.66%
GBP/AUD 1.9010 1.9080 1.8546 2.80%
GBP/NZD 2.0150 2.0331 2.0002 1.62%
GBP/CAD 1.7200 1.7228 1.6724 2.93%

Today's Market Highlights

Minutes from recent monetary policy decisions will remain in focus today, with the ECB set to publish the account of October's meeting this lunchtime. 

Despite the October meeting seeing nothing in the way of policy changes, market participants will pay close attention to the minutes for any hints on the policy outlook. A note of caution is, however, required, with new ECB President Lagarde having taken over on 1st November, the minutes will not reflect her policy views. Nonetheless, the now usual ECB comments that the balance of risks remains tilted to the downside, and that eurozone governments should enact fiscal stimulus, will likely be repeated once again.

For the euro, the minutes are unlikely to have a significant impact, with tomorrow's keynote speech from President Lagarde of significantly more interest.

Elsewhere, election headlines will continue to dominate for sterling, with the opposition Labour Party set to launch their manifesto this morning. Investors will be paying close attention to the policies within the manifesto - specifically taxation and nationalisation plans. The latter may have significant impact on the UK equity markets, particularly if fresh nationalisation plans are announced, adding more stocks to the Labour 'danger list'. Also of interest will be whether the manifesto provides Labour with a much-needed poll bounce, though this will only become clear after a couple of days. If there is no noticeable impact, sterling should remain well-supported as the chances of a Tory majority increase, with time running out for Labour to close the gap.

On the data front, a host of second-tier releases are due this afternoon, though are unlikely to result in significant volatility, with markets set to remain driven by shifts in risk appetite stemming from US-China trade relations. This afternoon's releases include last week's US initial jobless claims, October's US existing home sales, November's preliminary eurozone consumer confidence, and October's ADP employment change estimate for Canada.

Overnight, focus will shift to Japan, with October's inflation data due. As is now usual, the pace of price increases is expected to remain incredibly benign, with headline CPI expected at just 0.3% YoY. While this would represent a modest uptick from September's level, inflation remains well-short of the BoJ's 2% target - a target that policymakers are increasingly unlikely to ever hit. However, the sluggish pace of price increases is unlikely to elicit any form of monetary policy response, with the BoJ's toolkit already exhausted.

Speaking of monetary policy, a number of speakers are due today. Of particular interest will be remarks from Bank of Canada Governor Poloz, due this afternoon, especially if there are any nods towards looser monetary policy in the near future. Also due are two speeches from ECB Vice President de Guindos, and remarks from über-dovish Minneapolis Fed President Kashkari.

Today's Economic Calendar

Time Currency Release Consensus Previous
12.30pm EUR ECB Meeting Minutes (Oct)
13.30pm USD Initial Jobless Claims (Nov 15) 219k 225k
15.00pm USD Existing Home Sales (MoM - Oct) 5.47mln 5.38mln
15.00pm USD Prelim. Consumer Confidence (Nov) -7.3 -7.6
23.30pm JPY CPI (YoY - Oct) 0.3% 0.2%