Trade War Déjà Vu

Risk assets are supported by returning trade optimism; eurozone manufacturing woes continue; RBA leave rates on hold; services sector in focus today

Previous Day's Market Highlights

Here we go again, a Sino-US trade deal is said to be close.

Despite having heard this a multitude of times before, markets nonetheless struck a risk-on tone as a fresh trading week began. Comments from US Commerce Secretary Wilbur Ross were the main factor giving risk sentiment a shot in the arm, as Ross indicated that there is 'no natural reason' why a phase one trade deal can't be signed this month, saying that talks on such a deal are 'very far along'. Ross further aided sentiment by adding that the US 'may not need' to impose tariffs on EU automobiles, helping to dampen some fears of the trade war propagating to other nations, away from China. Speaking of China, officials are said to be reviewing President Xi's options to visit the US to sign a phase one deal, while Vice Premier Liu He is said to be ready to speed up trade talks with Japan.

Overall, improved sentiment on global trade relations - not just those between the US and China - resulted in gains for risk assets. Both the Aussie and Kiwi dollars added around 0.4%, the latter aided by the signing of an upgraded free trade agreement with China. The dollar also gained ground, adding 0.35% against a basket of peers, as some fears over the health of the US economy receded. In contrast, safe-havens lost ground; the Japanese yen shedding 0.4%, the Swiss franc losing 0.25%, and Treasury yields rallying by around 5bps across the curve. Sentiment was further buoyed overnight, after reports from the FT that the US are considering dropping some tariffs on China, perhaps paving the way closer to an agreement 

Elsewhere, sterling continued to meander, with political headlines once again lacking in significance, thus failing to give sterling impetus in either direction. Rumours continue to swirl of a so-called 'remain alliance' being formed between 3 smaller, pro-EU parties, namely the Liberal Democrats, Green Party and Plaid Cymru (Welsh nationalists). Such a pact would result in two of the parties stepping aside in up to 60 seats, in an attempt to avoid splitting the remain vote, though the impact that this will have on the election result remains to be seen. Meanwhile, in the Commons, Sir Lindsay Hoyle was elected as the new Speaker, who will likely have a key role to play in the ongoing Parliamentary Brexit process.

On the data front, October's final eurozone manufacturing PMI figures were broadly in line with expectations; the index reading 45.9, pointing to a 9th consecutive monthly contraction in the industry. The index appears to be stabilising at a relatively depressed level, with a continued decline in new orders raising the prospects of the slowdown becoming more prolonged, and pointing to a significant quarterly decline in industrial production. The release, and ongoing concerns over the eurozone economy, dragged the common currency 0.3% lower over the course of the day.

Overnight, the RBA's latest monetary policy decision was largely a non-event. Policymakers, as expected, kept rates unchanged at a record-low 0.75%, while repeating their guidance that policy will be eased 'if needed' to support sustainable growth. The Aussie dollar was unmoved by the announcement, with attention continuing to centre on trade developments.

Away from FX, the improved trade sentiment aided equity markets on both sides of the Atlantic. In Europe, the pan-continental Stoxx 600 closed 1.05% higher, reaching an almost 2-year high. Across the pond, all three major US indices closed at record highs, the benchmark S&P 500 adding just under 0.4%. Oil prices were also well-supported by the upbeat trade headlines, with both Brent and WTI settling around 0.6% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1575 1.1661 1.1427 2.01%
GBP/USD 1.2880 1.3012 1.2515 3.82%
EUR/USD 1.1125 1.1179 1.0991 1.68%
GBP/AUD 1.8650 1.9094 1.8076 5.33%
GBP/NZD 2.0075 2.0559 1.9311 6.07%
GBP/CAD 1.6930 1.7095 1.6253 4.93%

Today's Market Highlights

The health of the services sector will be in focus today, with market participants set to pay close attention to today's PMI surveys for any signs that ongoing manufacturing woes are spilling-over into other sectors of the global economy.

From the UK, October's services PMI is expected at 49.7, set to remain below the crucial 50.0 barrier between expansion and contraction for the 2nd straight month. The release, however, while potentially being a tad concerning for the longer-term prospects of the UK economy, will likely have little immediate impact on sterling, with the near-term direction of the pound continuing to be dominated by ongoing political developments. The balance of risks for sterling remains tilted to the downside, as a result of uncertainties mounting throughout the general election campaign.

Across the pond, October's ISM non-manufacturing PMI survey is expected to show the sector remaining resilient. The index is set to print 53.4, representative of a relatively strong pace of expansion, despite ongoing US-China trade tensions. Of course, the FOMC will closely examine the release as policymakers continue to assess the impact recent 'insurance' cuts are having on the US economy. Markets will also get a read on September's trade deficit, likely to be used by President Trump as another line of attack in the trade war, while similar trade figures are also due from Canada.

Overnight, focus shifts to New Zealand, with third quarter labour market data due. The report is set to show a high degree of slack persisting in the jobs market, with unemployment expected to tick up to 4.1%, and employment expected to increase by only 0.3% on a QoQ basis. The ongoing labour market slack is expected to contribute to subdued wage growth, with labour costs expected to increase at just 0.6% QoQ. If released in line with expectations, the jobs data points to the RBNZ remaining in easing mode, with policymakers likely to announce a 25bps rate cut at their policy meeting next week.

Finally, turning to monetary policy, a number of non-voting FOMC members are due to speak today. Remarks from hawkish Richmond Fed President Barkin, neutral Dallas Fed President Kaplan, and über-dovish Minneapolis Fed President Kashkari will be parsed for any hints on the policy outlook. Also in focus will be minutes from the BoJ's September policy meeting, due overnight, with investors paying close attention to any signs of additional stimulus on the horizon.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Services PMI (Oct) 49.7 49.5
10.00am EUR PPI (YoY - Sep) -1.2% -0.8%
15.00pm USD ISM Non-Manufacturing PMI (Oct) 53.4 52.6
21.45pm NZD Unemployment Rate (Q3) 4.1% 3.9%
21.45pm NZD Employment Change (Q3) 0.3% 0.8%
23.50pm JPY BoJ Meeting Minutes (Sep)