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Pound breaks 1.30 on Barnier Brexit optimism. Europe to open lower

On Wall Street, a rally in the big tech stocks helped drive the S&P 500 and Nasdaq further into record territory. Shares of Apple and Amazon both hit record highs. European investors, however, might well begrudge the string of new records on Wall Street, which have not crossed the pond.

News that Canada has rejoined the NAFTA 2.0 negotiating table is a boost for market sentiment. Both the Canadian dollar and Mexican peso extended gains in forex markets on hopes of a new North American trade deal. It is still not a done deal that Canada will accept many parts of the deal struck between the US and Mexico. Canada now has to hurriedly work out a deal, hat in hand. The best Canada can probably hope for is keep its ability to dispute anti-dumping and countervailing duties measures by the US under chapter 19. Canada will probably have to sign on to the rest or risk much worse arrangements with the US outside of trade agreement. Any deal involving Canada is likely to be good for market sentiment, but some Canadian (especially energy) firms stand to be disappointed, depending on the terms agreed.

Moody’s downgrading Turkish banks has put a spotlight back on the economic strife in Turkey. Its neighbours in Europe are debating financial assistance. Given that the European Union has been dragged kicking and screaming to help Greece, one of its own members, anything more than a pat on the back for Turkey seems unlikely. Business conditions are likely to worsen in Turkey unless sanctions are lifted. It would appear the only way sanctions will be lifted is if President Erdogan backs down and releases the US Pastor.

In forex markets, the pound has rocketed back to 3-week highs, with GBPUSD back over 1.30. EU chief Brexit negotiator Barnier in his most positive comments to date about a Brexit deal being made shows the EU may be taking a No Deal scenario seriously. His comments came on the back of reports an October deadline for Brexit divorce talks is dissolving into a November deadline. We see Barnier’s comments as a medium-term turning point for the pound. Sterling has disregarded the fundamentals of higher UK interest rates because of the risk of a No Deal Brexit. If the EU is determined to do a deal along the lines of the Chequers agreement, the pound has much further north to go.

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