Trade pessimism strikes, Fed minutes, Brexit turmoil
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%
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?
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.