Insight Multi-Asset weekly update – week beginning 15 October, 2019

From

Market and economic review

Positive developments in both trade and Brexit result in a strong week for equities

Despite last week beginning with a series of negative headlines around the US-China trade war, the outcome of the planned talks between President Trump and Chinese Vice Premier Liu He gained positive momentum as the week progressed. Without much else to focus on, global equity and bond markets seemed to track the ebb and flow of news headlines on a likelihood of a deal materialising.

In a similar vein, hopes for a Brexit deal between the UK and the European Union started from a very low point, however as the week progressed signs emerged that a deal might possibly be reached. Following those developments closely, the pound steadily weakened throughout the week before strengthening almost 2% vs the US dollar on Thursday and continuing its rally through Friday to reach a five-month-high.

In line with moving closer to a potential trade deal and Brexit resolution, global equities performed well led by European and Asian bourses. Government bond yields backed up and the main volatility in FX space was in GBP.

A turbulent week, but positive signs for a potential trade deal

As mentioned above, markets were pulled in all directions as news flow on trade dominated the headlines. Before delving into that, it is worth setting the scene with a reminder that the US has agreed to impose tariffs on $250bn worth of Chinese goods from 15 October.

The first piece of news came over the weekend suggesting that China is increasingly reluctant to agree to a broad trade deal. The mood then began to improve when Larry Kudlow, the Director of the US National Economic Council, stated that the US would not delist Chinese companies (something the US had previously hinted at). However, that was followed shortly after by news of the US blacklisting a group of Chinese technology companies for their involvement with China’s treatment of the Uighur minority group. To add further fuel to the fire, China then responded to this with a threat of retaliation. The unpredictable developments continued with news from China suggesting they would leave the US one day earlier than they had initially planned – hardly setting a positive scene for trade talks to take place.

Sentiment then turned positive once again when a news story from Bloomberg suggested that China was open to a partial trade deal, should President Trump agree to not impose the further tariffs previously mentioned.

A surprise pathway to a possible Brexit deal appears

Having considered Prime Minister Boris Johnson’s Brexit proposal, Michael Barnier, the EU’s chief Brexit negotiator, claimed that the terms were not in a form that they could accept. Whilst no agreement on a deal was reaching a forgone conclusion, the market was taken by surprise on Thursday when a joint statement from Johnson and Ireland’s Leo Varadkar said that they could see a pathway to a possible deal.

Johnson has until the EU council meeting on 17 October to agree a deal, otherwise the so-called ‘Benn Act’ forces his hand in requesting an extension to the 31 October deadline. There is some concern from the anti-no-Brexit camp around this, as Johnson has made it clear that he will not request an extension despite how negotiations evolve. 

Update from the data docket

On the data front the main releases were inflation numbers from the US, and Japanese machine orders which generally provide a good indication of the current state of global production. On the former, the September US CPI number was unchanged month-on-month (m/m) meaning that core inflation in the US remains stable at 1.7%. The positivity around trade more than offset any feed through into Treasury yields. The market pricing of a Federal Reserve 0.25% interest rate cut at its October meeting now has a 65% probability.

The August Japanese machine orders number came in 1% below consensus, at -2.4% m/m which follows a 6.6% decline in the July print. Staying with Japan, inflation numbers also disappointed printing at -1.1% year-on-year (y/y) for September, from -0.9% y/y in August.

Elsewhere, the Federal Open Market Committee minutes were released although they did not contain any market-moving information. The most notable point was that the Committee agreed it should soon discuss an appropriate level of reserve balances in the wake of the recent issues experienced in the US dollar money markets. This should clear the way for an announcement for renewed balance sheet growth at the next Federal Reserve meeting on 30 October.

Outlook

Following last week’s developments, the direction of markets will likely be dictated by news flow on the potential US-China trade deal. On that front, China’s Q3 GDP release should provide a sense of how the economy is reacting to continued trade tensions. Other data releases worth mentioning are US retail sales and industrial production numbers. 

Developments in Brexit negotiations ahead of the European Council meeting towards the end of the week will be closely watched. Global policymakers are due to gather in Washington for the IMF and World Bank’s annual meetings, and the IMF releases its World Economic Outlook.

Away from data and political developments, the US earnings season kicks off in earnest with 20% of S&P 500 Index constituents reporting. The first week is dominated by the big banks (Citi, JP Morgan, Wells Fargo, Goldman Sachs and Merrill Lynch). Expectations are for negative earnings-per-share growth of -4% which would represent the first negative quarter since 2016, and revenue growth looks likely to remain positive (+2%), highlighting how margin pressure continues to drag on corporate profitability.

By Adam Kibble

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