Trade pessimism strikes, Fed minutes, Brexit turmoil

Morning Note

Yesterday, global equity indices dropped sharply amid an apparent deterioration in US-China relations on the very eve of high level trade talks. Having already narrowed the scope of talks, all of the lines so far out of Beijing don’t augur well for a positive outcome. And having already added 28 Chinese companies to its black list due to alleged human rights abuses, Washington’s subsequent move to sanction officials associated with the detention of Uighurs does not appear timed to smooth these discussions. Trade and human rights may be separate, but it’s hardly adroit diplomacy. So far we can see nothing that gives hope of even a narrow deal, let alone anything more comprehensive. Hopes of even a truce are fading fast. 

Wall Street balked at the deteriorating trade talks that hadn’t even started. The S&P 500 fell 1.6% and broke beneath its 50-day and 100-day moving averages. Key tests on the 23% fib level and 200-day line sit just a little below. We saw a big ping off the 61% retracement on Monday and we’ve broken down through two more Fib levels to rest on the 23% line.

European markets were softer too. The FTSE 100 retreated below 7150 while the DAX gave up 12000 to end on 11970. Whilst the FTSE is shade higher, elsewhere European stocks are flat to mildly negative in early trading. European indices are likely to show a degree of caution ahead of the Fed minutes and trade talks. Drill is the same right now – watch the ranges.

The Fed meanwhile is resuming asset purchases. If it looks like QE, smells like QE, then surely it’s QE? Well it’s not. This is about short term repo markets – which went a bit haywire lately – and not about longer term injections of stimulus to boost the economy. Balance sheet growth ends the QT phase begun in 2018. But balance sheet expansion, for that it is what it is, is not QE. It’s definitely not QE, ok?

Market attention will be on tonight’s Fed minutes for clues about the level is discord among FOMC and of course the likely next course of monetary policy. It’s worth noting that only a third of FOMC members see a further rate cut this year – the consensus according to the dots is that the mid-cycle adjustment is over. However we know that market expectations are highly tilted towards a further cut in October, and eco data has of late been softer. The ISM figures that have come out since the meeting will support the case for cuts. Meanwhile the unexpected decline in PPI inflation between August and September is also going to be lending weight to the doves. What might persuade the two-thirds to vote for a hike this month? The minutes should tell us. Powell also indicated that a rate cut is possible due to trade and Brexit – he’ll find a way. CPI numbers out tomorrow could be a fly in the ointment, but the general uncertainty around the global economy and trade, combined with the slowing in the survey figures should keep the Fed on track to cut this year.

Post the Merkel call, Brexit talks are all but dead. We now move onto the more uncertain, and perhaps radical, stage of Revoke versus No deal – the battle lines which are being drawn for the next election. Report indicate there’s Tory unhappiness about running on a no-deal ticket. One feels it wouldn’t go that far, but we’re in very uncertain times…would Boris do the full Peel and split the party over this? 

Sterling came under pressure and remains in a defensive posture with GBPUSD holding a little above 1.22. If this goes then one senses the stops are out and we face a retest of the multi-year nadir on 1.19. If it holds we should look to near term resistance at 1.22267 and then 1.22375. Meanwhile EURUSD has found a support at 1.0940 and bounced off that – another test of 1.10 could be on the cards. The fourth rally towards that level in four sessions ran out steam earlier than the previous three tries – if we fail to clear that latest peak we would consider that the bulls are tiring.

Trade pessimism hit oil a touch as WTI declined to $51.80 before recovering overnight to trade around $52.50. Inventories today forecast to show a build of 1.8m barrels. Gold continues to float around in its orbit around $1500. Bulls are determined to hold this level. We’ll be looking for fresh impetus from the Fed minutes and trade talks to see whether US Treasury yields take on a new direction.