The market caught deal fever last week but hope turned into skepticism early this week. Indices are higher, awaiting the release from the rest of US bank earnings (after JPM beat estimates). GBP is the strongest performer of the day amid recurring remarks from UK & EU officials expressing attempts to reach a deal in the final innings (more below). Beijing said it would buy $50 bn more in US agricultural goods only if Washington removed retaliatory tariffs set since the start of the trade war. A new Premium trade has been issued, backed by 3 charts & 6 key notes. The chart below highlights the emerging support for the GBP's trade weighted index amid Brexit negotiations.
One way to look at the China-US trade deal is probably through the Federal Reserve's prism. Policymakers have been relatively consistent with the idea that the economic impact has been modest, but uncertainty did curb business investment, while threateneing consumer confidence.
The deal announced Friday is a short-term ceasefire that removes two months of uncertainty at best. Reviews in the Chinese press have left out parts of the deal that that US has touted, like agricultural purchases and the 'phase 1' terminology that Trump has touted. It all reflects an unease that any commitments will last. That was reflected in trade on Monday as yen crosses drifted lower along with stock markets.
Earlier today, St Louis Fed president Bullard said the Fed's hitting the low side of inflation target is concerning and that monetary policy will not fix th problems created by tariffs.
UK-EU not giving upA revised set of proposals with regards to the cutsom rules for Northern Ireland was submitted by UK negotiators to the EU as the 2 sides attempt to reach a deal this week. Worries remain concrete with DUP officials expressing skepticism of any deal that doesn't leave them fully in the UK. Yet the highest levels in 10 Downing Street report that EU and UK officials are making progress. That leaves markets in the uneasy position of wondering if a deal can get through Parliament.
Elsewhere, US banks' earnings season hits today, with JP Morgan beating earnings estimates. Goldman Sachs, Citigroup and Wells Fargo will follow shortly.
Saying there is a Brexit deal or no-deal is not helpful in these markets. Making the prediction that GBPUSD will rise, or will not fall below 1.18 is fine, but will not make you money. Committing funds to a tradable idea with price parameters is what this market is all about. 3 weeks ago, I identified the similarity of the pattern in GBPUSD price action in Sep 2019 to that in Sep 2018, suggesting a temporary pullback will emerge prior to an shar recovery. A repeated pattern is often called a fractal or analog (scale and duration does not have to be exact). This was issued as a long trade for the Premium susbcribers. Other factors such as GBP cycles and peaking USD peak also helped us take the trade. OUTCOME: GBPUSD's 3rd biggest weekly gain in over 10 years.
Sterling made its biggest weekly percentage gain vs USD in over 2 years and its 4th fastest rise in 10 years amid successive positive news on the Brexit negotiations front (more below). The Premium long trade in GBPUSD hit its final target for 260-pip gain. A solid Canadian jobs report dragged USDCAD lower by nearly 80 pips to 1.32. Markets now await comments from Trump on his meeting with China's vice premier as the US-China talks enter their 13th round. The other story is that of USDX selloff as the index broke its 55-DMA.
GBP extended its rally this morning when UK Brexit minister Stephen Barclay told ambassadors from the 27 EU member states earlier on Friday that sufficient progress had been made with his EU counterpart Michel Barnier in order for discussions to intensify. More developments are awaited ahead of next week's EU summit as well as the reaction from the DUP. GBP bulls are now reasoning that Boris Johnson had little choice (either to ask for a delay, or accept a deal) instead of being ready to leave without a deal.
GBP is now the best G10 currency performer since the start of Q3 (beginning of H2) and is the 3rd best performer year-to-date (behind CAD & JPY)
Onto US-China TalksThe market is pricing in a US-China trade deal that includes no new tariffs in exchange for agricultural purchases and a hollow FX pledge. That's nothing like the comprehensive deal many were hoping for but there is a reason the market liked it anyway. The Canadian jobs report is due on Friday but trade headlines will continue to dominate.
A 'trade deal' is the wrong term to describe what appears to be shaping up between the US and China. This is more of a ceasefire that includes the bare minimum for both sides to save face at home and mitigate economic damage.
This wasn't what anyone was hoping for but markets are signaling it's good enough for now. Why? Mainly because it appears the US is backing down. If the truce comes together (and that's still far from certain at this point), it's because the US has backed down. They have been the aggressor in this fight and if Trump has had enough for now then he's not likely to escalate it until after the election.
In addition, this type of deal leaves enough uncertainty intact to keep the Fed easing cycle going. Or at least the market thinks it does. We will be watching for any signals to the contrary ahead of the Oct 19 blackout.
Looking further out, the deterioration in the US-China relationship is dire. The 'uncertainty' that the Fed has been lamenting on trade is now a permanent feature. It's entirely clear that a decoupling is underway and the only variable is the pace.
There are also important questions outside of the two countries. Those who can continue to trade openly with both sides stand to benefit, even if the overall picture means slower global growth.
|FOMC's Rosengren Speaks|
|Oct 11 17:15|
Wild fluctuations in indices during the least liquid time of the day (post-US, pre Asia) gave way to a gradual rebound into the US session. Sudden declines in equity markets on reports that China's delegation could leave the US early were reversed higher later after Trump tweeted he would meet China's vice Premier. US CPI came in lower than expected. GBP spiked over full cent to 1.2315 on an optimistic joint statement from UK and Irish PMs Johnson and Vradkar. The Premium short in the DOW30 was stopped out and a video for Premium members has been released below.
Trade Talks' Low Bar of ExpectationsHeadlines will continue to dominate in the hours and days ahead but judging by the positive reactions to some of these headlines, expectations have been lowered to the point where any kind of a ceasefire would be a moderate win (but perhaps a fleeting one).
The trade meetings this week are dominating markets but a secular theme in global economies is low inflation. It was something the Fed highlighted in the FOMC minutes and will be a focus in the day ahead with the US CPI due. On Wednesday, the euro was the top performer while the yen lagged.
Fed's Low Inflation TrapThe Fed argument for lowering interest rates has slowly shifted from one primarily about trade risks and uncertainty to broader concern about low inflation. It's all a bit rich considering the Fed has missed its inflation target for years and was hiking rates but it's pertinent nonetheless.
That's especially true because there are signs of a turn in the economy. Wednesday's JOLTS report showed the third consecutive decline in job openings, something that hasn't happened since 2009. The level of opening remains high and the overall jobs market is very strong but there are few signs that it will strengthen further and that means any wage pressures could soon dissipate.
With just 9 days until the blackout period begins, officials will need to make a concerted effort to tame cut expectations, which are at 78%.