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The limiting factor

​​​​​​Today's news headlines:

  • ‘Europe turns up heat on Iran in bid to save nuclear accord’. The UK, Germany, and France have escalated tensions with Iran by taking formal action for breaching restrictions on uranium enrichment set out in the 2015 nuclear accord. Iran will be given 15 days to try to resolve the breach with the EU before China and Russia get involved in a debate that may end with stiff UN international sanctions. (Bloomberg)
  • ‘US and China prepare to seal “phase one” trade deal’. This afternoon, the US and China will formally sign off on a trade deal at the White House. The agreement includes $200 billion of additional purchases of US goods among pledges from China on currency interventions and intellectual property. In exchange, China will roll back tariffs and an indefinite hold on punitive measures from the US. (Financial Times)

Window dressing

The US is set to sign a phase one trade deal with China today, but the agreement is largely symbolic of minor de-escalation, not a change in thinking. Over the past several days, we’ve witnessed small signs of progress between the US and Chinese; the US removed China from the Treasury’s list of currency manipulators and reduced tariffs on several billion USD of Chinese hardware. The problem is that the lion’s share of tariffs will remain until after the US presidential election in Nov 2020. It was also reported that the US administration is drafting rules to block further Huawei sales, if the Chinese do not comport to phase one deal terms. 

The negative market reaction to this news is somewhat ironic in that the administration has always sought an enforcement mechanism, so this is hardly surprising. If the small goodwill gestures keep on coming, we can probably assume the Chinese were not taken unaware by this measure. Whether any of this leads to a phase two deal is another matter entirely. We’re not alone in thinking that Chinese officials may be lying low and hoping for a change of US leadership before resuming negotiations.

Bottom Line: Todays minor risk-off is probably a short-term blip, but neither is a clear risk-on tone likely to prevail either. Markets are still trying to call a bottom to 2019’s economic deterioration before more positivity takes hold. The high level of equity valuations may be a limiting factor for market sentiment, even when the turnaround comes. Bear in mind that market downturns are usually caused by overexuberant asset prices not recession, which means many investors are increasingly positioning in quality assets because they sense the central bank swell has lifted all boats…even those with holes them.


Yesterday, Cable reversed some of this week’s losses climbing back above the 1.30 figure. However, the pair trades heavy early on in today’s session placing it back below its 50-daily moving average of 1.3022. On a trade-weighted basis, both Sterling and the Dollar are testing resistance levels at key moving averages which could create flatter trading in the short-run. However, UK inflation data out this morning could cause the pair to trend lower if the reading undershoots expectations.


The currency cross extended this week’s losses reaching lows of 1.1633 yesterday morning before closing the session around the 1.17 level. This morning, Sterling selling pressure sent the pair back below 1.17 as Bank of England member Saunders made dovish comments. Recent UK data and dovish comments have caused markets to price in interest rate cuts in 2020, and today’s inflation data could reinforce this view, sending Sterling lower.


This week’s gains were partly erased yesterday as the pair tested the 1.11 level, but a close above the big figure could consolidate further gains for the common currency. This afternoon hosts key US inflation and manufacturing data which could prompt the pair to test the 50 and 200 daily moving averages which sit at 1.1093 and 1.1139 respectively.