Storms ahead but markets hope for trade truce

Morning Note

Expect stormy conditions and the risk of the whole thing being called off. No, not the Rugby World Cup, but trade talks in the US (and Brexit…). Investors are still holding grimly to the hope of a trade truce, if not quite a full-blown deal.  

US stocks took a knock at the death amid yet another source-based report on trade talks, but still managed to rally for the first time in three sessions. The S&P 500 rose 0.9%, honing back in on the 50-day moving average, but had been as much as 1.3% higher at one stage. The 50-day line needs to be watched as it will form an important point of resistance. European markets were also stronger. Shanghai and Tokyo have firmed overnight. Europe got off to a pretty decent start with the main bourses in the green as investors pin their hopes on a positive outcome on trade. 

Indeed news flow around trade talks are sure to keep traders on their toes today as the discussions in Washington are finally due to commence. At the moment, we may think that a narrow deal or truce is possible as China wants to avoid the hike to 30% from the current 25% on tariffs on $250bn of imports due to take effect Oct 15th. They could essentially fire up one or two elements of the deal that was being negotiated before the talks broke down earlier this year. Anything much more than that is just wishful thinking.  

The US is playing hardball – or at least the administration is. On top of visa restrictions and adding companies to its blacklist, the White House is now mulling a crackdown on Chinese contraband. Yet another contentious point for the delegations to consider.  Meanwhile, it seems every US company is scared stiff of China – now Apple has dropped the app that Beijing took issue with.

In the last few hours we’ve had a report from SCMP that low-level preliminary discussions had broken down with no progress. But then we’ve had a report that the US will start issuing licences to some US companies to sell goods to Huawei.  Usual drill – be ready for a lot of conflicting news flow and for talks to break down completely. 

Minutes from the Federal Reserve’s September policy meeting showed worries about the economy, with recession indicators elevated since the July meeting. The minutes said several FOMC members pointed to statistical models indicating that ‘the likelihood of a recession occurring over the medium term had increased notably in recent months’. Markets now see an 85% chance of a rate cut at the end of the month.  

All eyes today on the CPI number coming out today, which has been steadily marching higher over the last three months. FOMC members did not seem overly bothered about this and indeed were more worried about importing inflation from Japan and Europe, the minutes indicated. 

Gold was up to a week-high overnight at $1517. Oil keeps sliding around the $52.50 level with little direction. At the moment there doesn’t seem much in the way of a risk premium from Turkey’s incursion into Northern Syria.

EURUSD is threatening to break out above 1.10 – again. At send time it had broken the level and made a new high for October that brings the 1.1020 level initially into focus before we consider 1.10750 and ultimately a return to 1.11. Interesting news that Draghi overruled his own ECB officials to restart QE. The suggestion is that maybe the new Lagarde-era ECB will not be so dovish? To be fair, super-loose monetary policy has run its course – something else needs to be found – you cannot keep cutting more into negative territory. 

Sterling remains sensitive to Brexit news – but GBPUSD is holding onto 1.220 and at send time was pushing up to 1.2240. As we’ve detailed already, a break below 1.22 could well see a sharp drop as it’s chased.