EU and US equity markets traded in a risk-on manner yesterday, following reports that China will seek an interim trade deal with the US. The talks are set to kick off today, with investors on the edge of their seats in anticipation of whether this would be the case. The pound surged after a report said the EU is ready to make “a major concession” on Brexit, but turned back down after Northern Ireland’s DUP said it would oppose such an offer. As for today, apart from the US-China and Brexit sequels, participants may also pay attention to the US CPIs for September.
The dollar traded mixed against the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained against JPY and CHF, while it underperformed versus EUR, GBP, and AUD. The greenback was found virtually unchanged against CAD, NZD, NOK and SEK.
From risk-off back to risk-on. Financial markets took another spin yesterday during the EU trading, following reports that China is willing to pursue an interim deal with the US. Although this was the base case scenario as the week got underway, Tuesday’s developments slashed hopes on that front. Remember that China’s Commerce Ministry said that they would retaliate on the US’s decision to blacklist 28 Chinese companies, while the US widened the list and also imposed visa restrictions on several Chinese officials.
The positive sentiment rolled over into the US trading, but gains could have been larger if it wasn’t for a headline saying that China has lowered its expectations with regards to this round of negotiations. The Asian session was marked with even more volatile swings, with equities trading mixed. They took a dive following a report that the Chinese delegation was planning to hold talks for only one day, but rebounded after a White House official denied the news. Then, they retreated somewhat again as another report confirmed that Chinese officials would indeed be leaving after today’s talks.
As for our view, there are still chances for a preliminary deal this week, but the recent developments suggest that those chances have lessened. There are several reasons why we believe the two sides could still find some sort of middle ground. Following the impeachment calls against him, as well as the disappointment in the ISM indices, which suggested that the economy may be affected by the trade conflict more than previously thought, Trump could soften his stance in an attempt to revive his chances of being re-elected next year. On the other side of the equation, China may prefer to wait for a new US President, in order to negotiate more favorable terms, but they would also like to avoid fresh tariffs. So, they may eventually agree on a preliminary deal, which could support the broader market sentiment even more. Equities could continue gaining, while safe havens, like the yen and the franc, are likely to stay pressured. Now, if the two sides are unable to make any progressive steps, this could lead to more tit-for-tat tariffs and thereby, further slowdown in global economic activity. The market reaction could be the opposite. Investors are likely to abandon riskier assets and seek the shelter of safe havens.
Lately, the Dow Jones Industrial Average index has been moving in a choppy manner, without any clear direction, at least in the short run. The index is stuck between two short-term tentative lines, and upside and a downside one. Given that there is still no clarity on its near-term vector, the price may continue moving in between the above-mentioned lines, hence why we will remain neutral, at least for now. We will keep monitoring the developments around the China-US trade talks.
A push above one of yesterday’s intraday swing highs, at 26420, could open the door for a slight move higher, which initially could lead the index to the 200 EMA on the 4-hour chart, and then to the 26660 barrier, which is the high of October 7th. DJIA might stall there for a bit, or even correct back down. That said, if the price remains above the 26420 hurdle, it may accelerate to the upside again, break the 26660 this time and test the 26835 area. That area is marked by an inside swing low of September 30th. Around there, DJIA could also test the aforementioned downside line, taken from the high of September 19th.
Alternatively, if the price slides and breaks below the previously-mentioned upside line, drawn from the low of October 3rd, this could start raising interest among more sellers, especially if the index falls below the 26020 hurdle, marked by yesterday’s low. A further move down could send DJIA to the 25735 zone, which is the low of October 3rd, a break of which might push the index a bit lower, towards the 25630 level. That level marks the low of August 28th.
The pound was found slightly higher against its US counterpart, but the ride was not as smooth as it seems. Cable surged around 60 pips on reports saying that the EU is planning to make a “major concession” with regards to Brexit, offering a mechanism for Northern Ireland to leave a new backstop after a number of years. That said, Northern Ireland’s DUP (Democratic Unionist Party) was quick to respond that it would oppose such an offer. The pound reversed on DUP’s announcement and gave back most of the concession-related gains. With the clock ticking towards October 31st, the current Brexit deadline, we still consider the path of least resistance for the pound to be to the downside. As we noted yesterday, for the currency to reverse north and sustain any gains, a deal should be struck soon, which appears to be an imaginary case with what we have in hand now, or the two sides would have to agree on a new extension.
As for today, apart from the US-China and Brexit sequels, investors may also pay some attention to the US CPIs for September. The headline rate is forecast to have ticked up to +1.8% yoy from +1.7%, while the core one is expected to have remained unchanged at +2.4% yoy. That said, both the headline and core PPIs for the month slowed by more than anticipated, and thus, we would consider the risks surrounding the CPI forecasts as tilted to the downside.
Despite the latest projections of the FOMC suggesting no more cuts this year, investors remain well convinced that officials will act again, especially after the big disappointment in the ISM PMIs and Powell’s remarks on Tuesday that the Committee will “act as appropriate”. According to the Fed funds futures, they see a 85% chance for the Committee to push again the cut button at the upcoming gathering, and a negative surprise in the CPIs could drive that percentage even higher.
After peaking and then reversing to the downside on September 20th, GBP/USD drifted lower and is now trading below a short-term tentative downside line taken from the high of that day. But from the beginning of this months, the pair is struggling to bypass one of its key support zones, at 1.2200. Given the current technical picture, there might be a chance for a small correction, before another round of selling. This is why we will take a cautiously-bearish approach, at least for now.
If the rate rises, but finds it difficult to move above the aforementioned downside line, the bears might re-enter the field and drag GBP/USD back to the 1.2200 hurdle. If this time, that hurdle surrenders and we see the pair sliding below it, this could invite even more sellers into the game. Such a move would confirm a forthcoming lower low and may increase the pair’s chances of moving further south, possibly aiming for the 1.2105 level, marked by an intraday swing high of September 3rd.
On the other hand, if the aforementioned downside line breaks and the rate pushes above the 1.2335 barrier, marked near the high of October 7th, this could interest even more buyers, as such a move would place the pair above its 200 EMA on the 4-hour chart. This may be seen as a positive, which may help lift GBP/USD to the 1.2413 zone, marked by the high of last week. Initially, the rate might stall around there, or even retrace back down a bit. But if the bulls are still feeling confident, more of them could join in and drive the pair above the 1.2413 area and target the next potential resistance level, at 1.2500.
During the early European morning, we already got Norway’s CPIs for September. The headline rate ticked down to +1.5% yoy from +1.6% as expected, while the core one ticked up to +2.2% yoy from +2.1%, instead of staying unchanged.
Sweden’s inflation numbers are also scheduled to be released. Both the CPI and CPIF rates are expected to have ticked down to +1.3% yoy and +1.2% yoy, from +1.4% and +1.3% respectively. That said, once again, we will pay more attention to the core CPIF rate, which ticked down to +1.6% in August, from +1.7% in July. At its prior meeting, the world’s oldest central bank decided to keep interest rates unchanged and maintained the view that rates would be increased further towards the end of the year or the beginning of the next one. That said, further slowdown in inflation could raise speculation that Swedish policymakers may adopt a more dovish stance when they meet next, and perhaps remove from their statement the part referring to a possible hike this year.
From the UK, we get a bunch of August data. We have the GDP, the trade balance, as well as industrial and manufacturing production for the month. That said, although the pound may instantly respond to any disappointment or positive surprise in these releases, its faith remains hostage to UK politics in our view.
As for the speakers, we have two on today’s agenda: BoE Governor Mark Carney and Minneapolis Fed President Neel Kashkari.
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