The ongoing trade war between the US and China has presented a significant downside risk to the global economy and has been a key catalyst in the recent downturn of the business cycle. The implementation of ‘tit-for-tat’ tariffs combined with failed trade talks between the world’s largest economies has been the underlying narrative over the past year. As Trump heads to Japan to begin his G20 meetings on Friday, markets will be hopeful for signs of progress in the negotiations.
Overnight trading showed optimism is already being priced in - equities across the board are higher and the US 10-year treasury yield is clear of the 2.0% mark, having dipped twice below over last 2 weeks. However, this move is vulnerable to a swift reversal. Recent history would indicate the likelihood of progress being limited as China has already rejected extensive concessions demanded by the US. Trump’s unlikely to change his stance ahead of the meeting as he states - “It’s possible we’re going to make a deal, but I’m also very happy where we are now”.
Bottom Line: Successful negotiations will likely take months and a long-standing trade war won’t be solved over one weekend. Although signs of a truce may emerge, it will take material progress for the overnight flow into riskier assets to continue. Until then, the overarching market sentiment will be risk aversion.
Boris Johnson is softening his rhetoric on Brexit, stating it’s “vital that we prepare” for a no-deal, but the odds of crashing out are “a million to one against”. Is this surprising though? Dominic Raab, the strongest proponent of a hard-Brexit, is long gone from the leadership race. It seems there is little reason for Johnson not to soften his stance, to appeal to a wider cohort of his party. In contrast, members of Johnson’s team signalled a willingness to ignore parliament if it tried to block a no-deal as the legal default is to leave on October 31st with or without a deal. Johnson’s Brexit tactic hinges on being able to renegotiate the current deal with Brussels which requires taking the threat of a no-deal seriously.
Could Johnson really get a no-deal over the line? The sentiment is unlikely to command a majority in parliament but might be closer than you think. He would need 318 MP’s to support the notion and currently there are 312 Tory and 10 DUP MP’s. However, it may not be that simple. The last time parliament held a series of votes on no-deal, they were resoundingly rejected, with no version receiving more than 164 votes. According to Bloomberg, the number of Conservative MP’s who would vote for a no deal if instructed to totals 290 (at a push). This doesn’t take into account that under a Johnson government, a number of senior ministers such as Philip Hammond would retire to the backbenches in order to fight a no-deal. With no majority, Johnson would be stuck in the same position as May and the UK would be stuck in limbo.
Optimism ahead of this weekend’s G20 meeting has kept the Euro Index trading at 5-month highs and the US Dollar Index at the bottom end of this month’s 2% drop. EURUSD finds support around 1.1350 for the third time this week, as it tests the key 1.14 level once again.
The pair extends its 2-month decline, testing 1.1150 again for the third time this month. Euro strength is helped by the European Central Bank’s (ECB) recent dovish rhetoric regarding the tools at its disposal.
It’s business as usual with Sterling as the UK’s political race to lead Britain into the Brexit deadline continues. The pair climbs to test 1.27 as potential leader Boris Johnson claims chances of a no-deal Brexit are “a million to one”. The push higher is also supported by a weaker Dollar trading well below the 200 daily moving average and at its lowest level since March.