Another day, another rally

​​​​​​Today's news headlines:

  • ‘Brussels eyes easing bank rules to spur green lending’ – A proposal to increase green investment by easing EU banking rules has come under scrutiny by the ECB. Officials have warned against tweaking rules that were implemented to make bank lending less risky. The proposal involves lowering capital charges imposed on climate-friendly lending. (Financial Times)
  • ‘Corbyn struggles with ant-Semitism claims: UK campaign trail’ – Labour leader Jeremy Corbyn is fighting claims that his party have failed to effectively deal with complaints of anti-Semitism within the party’s higher ranks. In a BBC interview, Corbyn struggled to explain his response to questions on the issue, before coming under further pressure on his radical tax policies and approach to terrorism. (Bloomberg)

Goldilocks banking

Hopes for a phase one trade deal between the US and China are propelling asset prices higher, but the prospect of central bank easing is playing a role as well. Like a red cape to a bull, the phrase ‘phase one trade deal’ is like opening a sluice gate to a torrent of investor demand for risk assets. If the economy were moving at a faster pace – reflected in market fundamentals – that would make sense. However, there is a slightly different dynamic unfolding right now.

On Monday, Fed Chairman Jerome Powell commented that the Federal Open Market Committee members were quite comfortable with the current setting of monetary policy in the US and even see it as slightly loose. This should really be an encouraging sign for the US domestic market, since it suggests the Fed see greater potential for growth than they did a few months back, when they set about cutting rates under the guise of a ‘mid-cycle correction’. Given that loose monetary policy provides incentive to buy riskier assets, it’s possible to see this neutral policy stance (since rates are remaining on hold for a while) as less supportive of asset prices. Then again, the positive market outlook is precisely what the market has been waiting for and it probably offsets or even eclipses this concern.

The other piece of the puzzle is that the Peoples Bank of China are deploying a portfolio of policy measures to arrest growth declines and support domestic investment. Arguably, the economy most directly dependent on Chinese economic performance is Australia. Given that China’s deceleration has come under greater scrutiny, it’s not surprising to see the Reserve Bank of Australia has cut interest rates by three quarters of a percent over the past year. In fact, RBA’s Governor Philip Lowe co-authored a report on unconventional monetary policy tools since the global financial crisis and had previously hinted that the RBA might look at implementing some of them in the near future.  Yesterday, Lowe gave a speech which indicated further rate cuts towards 0.25% are more likely than quantitative easing, but he certainly didn’t rule it out. 

Bottom line: Investors up to their eyes in risk can probably rest easy knowing the Fed are signalling ‘clear weather’ while other G10 central bankers continue to loosen policy. It’s a fragile peace though; if the seemingly imminent phase one deal turns back into mist, the risk rally could evaporate just as quickly. Then, the fundamentals, which were carefully ignored or explained away, will once more stare us in the face, like a bad asset hangover.

GBP/USD

Yesterday, Cable edged lower as markets digested election polls that suggest a narrowing Tory lead. The pair opens London near the lower end of its 6-week range and could test the 1.28 figure as we reach spot month-end. A highly anticipated poll release due at 10pm today could force a flatter trading range in today’s UK session as markets await the outcome.

GBP/EUR

The currency-cross ticked lower yesterday back below the 1.17 level, finding short-term support at the 1.1650 level on London open. A light calendar for both UK and Eurozone data means today’s trading may hinge mostly on political developments and UK election poll releases. Month-end flows may also be greater than usual due to the US holiday tomorrow which may cause some intra-day volatility.

EUR/USD

The common currency opens the London session marginally above the 1.10 level and may provide support for the pair as we end November. US data out at 1:30pm could bring some intra-day volatility, but the pair could hit resistance at the 1.1040 level (50 daily moving average) and the 1.1080 level (100 daily moving average).