Financial market research and analysis

Chinese officials threw cold water on the optimism about Donald Trump’s first phase trade agreement, as they said to be willing to discuss more before signing a deal. We could already feel that the Chinese were not fully satisfied with their Washington visit, unlike Donald Trump. It now looks like Donald Trump needs a deal more than his Chinese counterparts. This is of course just a game of power. The latest trade metrics in China suggest that the emerging market giant also has growing interest in strengthening its trade ties with the US.

Hence, investors proved to be right as they approached Washington news with a certain degree of skepticism on Monday open.

Chinese equities erased a part of yesterday’s gains, after the US equities closed marginally lower in New York.

Shanghai’s Composite fell 0.70%.

WTI crude tested the $53 a barrel support on the back of fading enthusiasm regarding the US – China trade deal. On the supply-side, the Aramco plants have fully recovered last month’s attacks and the latest incident on an Iranian tanker saw little attention after Iran withdrew its accusation on Saudi Arabia.

The US dollar gained on a better-than-expected Empire Manufacturing read on Monday, and the US 10-year sovereign yield gapped below the 1.70% mark soon after the market resumed trading following Monday’s pause.

Gold traded above the $1490 an ounce, supported by softer sovereign yields. But there is a visible malaise above the $1500 handle, where sellers remain in charge of the market.

China fixed its yuan reference rate stronger than Monday, at 7.0708 versus 7.0725, though slightly softer than expected by traders.

Data-wise, producer prices in China retreated 1.2% y-o-y in September versus last month’s -0.8%, matching the market expectations. The consumer price inflation advanced from 2.8% to 3.0% however, slightly higher than 2.9% penciled in by analysts, mainly because pork prices rose 20% over the month, reaching a shocking 69% rise on the year.

The euro remains bid despite the heated Catalan protests amid twelve Catalan leaders were sentenced to 9-13 years in jail. But today’s ZEW survey, which is expected to confirm a further decline in German expectations could cap the topside in EURUSD and encourage some top selling within 1.1030/1.1050 area.

Pound-dollar call options are dominant above the $1.10 mark, while put options are in charge below that level.


Pound bounces on the Telegraph’s report

The pound bounced after hitting 1.2520 against the US dollar, as the Telegraph reported that the recent Brexit negotiations pointed at a possible solution to the Irish border enigma. But we also know that EU chief negotiator Barnier has recently pooh-poohed Johnson’s plan in Northern Ireland, as it lacked details.

Based on what we read, there are hanging uncertainties and a clear lack of progress in Brexit negotiations ahead of the crucial 17-18 October summit with the EU leaders. Though, this week’s meeting is not a line in the sand, as the rotating EU President Rinne told reporters that ‘there is no time in a practical way and in a legal base to reach an agreement before [this week’s] Council meeting’. Hence, negotiations could continue after the EU Council meeting, he said, as apparently, the EU needs more time.

Meanwhile, the chances of having a Brexit deal by the end of this month remain low. Now, the million-pound question is, will Boris Johnson ask his European counterparts for a delay in the Brexit deadline. If he respects the law forbidding him to leave the EU without a deal, he should do so. But there is a chance that we see Boris Johnson running around like a headless chicken and doing everything in his power to avoid asking for a delay in the deadline. The latter could force the pound to give back its recent gains.

Call options trail above 1.25 against the US dollar. Investors have been increasing their hedges against a stronger pound, given that the significant short bias in net speculative positions point at a decent risk of a short squeeze if the Brexit news are positive. The two-week risk reversals, which compare the call option premiums to put option premiums remain at the highest in record.

On the data front, the UK will release its latest employment figures today. The unemployment rate is expected to remain unchanged at 3.8% in August, while the weekly earnings growth excluding bonuses may have eased to 3.7% on three-month to August, from 3.8% printed a month earlier. It is worth keeping an eye on the jobs report, but the economic data will likely remain under the shadow of Brexit news, talks and speculations. Therefore, the market is expected to give a limited reaction to UK’s jobs data, unless there is a big surprise in latest figures.

The British blue-chip index closed 0.46% lower on Monday, as the pound sterling swung higher.

The FTSE is expected to open marginally higher on Tuesday. Mining and energy stocks will likely remain under the pressure of a fading optimism that last week’s negotiations between the US and China would lead to a deal.


Major US banks to announce results

The market attention will shift to company earnings starting from today. Expectations are low regarding the US companies' third quarter results, as the deepening trade disruptions are believed to have taken a toll on their activity.

JP Morgan, Goldman Sachs, Citigroup and Wells Fargo will announce their third quarter results today. Given the lower interest rate outlook in the US and elsewhere, investors will focus on the major US banks’ ability to counterbalance their falling interest rate income by a more efficient cost structure. JP Morgan may have increased its market share as a global investment bank following Deutsche Bank’s pullback.