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Market Sensitivity to Trade Talks & Brexit Remains Clear

The early sell-off on Wall Street gave way to a broad stock market rebound after one of the Fed’s more dovish members, Raphael Bostic, spoke up. Bostic stressed the need for Fed caution, believing that they were close to the neutral rate. These comments coming from a hawkish Fed member would have carried more weight. However, they eased the pressure on stocks and, combined with a rebound in Apple and optimism over US trade talks, sent the Dow rallying 400 points from its low to close 200 points higher.

The stronger finish on Wall Street didn’t translate across into Asia. Just hours earlier, optimism on trade talks helped Wall Street push higher, yet Asian markets had a mixed session as a breakthrough in trade war talks started to look unlikely once again. We are continuing to see high levels of sensitivity towards trade war headlines. The market was optimistically looking towards the G20 as a potential breakthrough date, but the fact is that when the two President’s meet there, the best-case scenario will be that they agree to keep talking. This is going to be a very long and very slow process, which is something the markets will need to grow used to. The increase in tariffs on Chinese imports entering the US in January is still expected to go ahead despite doubts earlier in the week.

Outlook for May and sterling remains shaky

The pound stabilised overnight, after a bloodbath in the previous session, as Theresa May continues to fight for her political life. Comments from the PM that she has no plans to step down offered a floor to the falling pound, which has edged marginally higher in early trade this morning. That said, we are not expecting any miracles from sterling. Pound traders will continue to be on resignation watch, whilst concerns over a vote of no confidence and the probability of a coup are still high. Traders will be positioning for a power grab by Eurosceptics. We don’t see the pound making any meaningful moves higher for the time being.

As we move towards the Parliamentary vote, if the deal makes it that far, negative headlines will be rolling, which we expect to weigh heavily on sterling.

Eurozone CPI in focus

The euro was edging higher in early trade as it heads into its fourth straight session of gains. Reports that Italy could be willing to work with Brussels over its spending plans, to avoid a fine, has offered some support to the common currency. Attention will now turn to eurozone CPI figures, which are expected to show an increase to 2.2% year on year, up from 2.1%. Month on month inflation is expected to dip to 0.2% in October from 0.5%, meanwhile, core inflation is forecast at a rather lacklustre 1.1%. Any disappointment could see the euro quickly give back some of its recent gains.


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