The cancelation of the APEC meeting in Chile robbed the US-China trade negotiations of urgency to get a phase 1 deal hammered out to announce at a big stage. Trade talk has been mixed with the market wary of the on-again off-again nature of the statements from both sides. Trump deflated hopes this week when he was back to his aggressive rhetoric as he targeted China in his remarks in NY. Trade headlines will continue to influence the markets, even as details on a potential truce have been scarce. The White House boosted trade hopes as economic adviser Larry Kudlow and Commerce Secretary Wilbur Ross were on hand to talk up the probabilities of a trade deal in the near future.
The Democrats could steal some of the trade thunder as House speaker Nancy Pelosi said that the USMCA ratification could be done this year. Ahead of an election year the democrats won’t want to give Trump a trade win, while at the same time the impeachment process gets in motion.
Pound Rises on UK Elections News and Weak Dollar
The GBP gained 1 percent against the USD in the last five trading days. Cable is trading at 1.2905 and could keep appreciating after the US dollar is sold off on trade optimism. The UK elections will be in less than a month and Boris Johnson is set to build on the momentum given to the conservatives by the Brexit party. Not everything is going according to plan as Brexit party candidates will not contest seats won by Tories in 2017 but will do so elsewhere potentially dividing the vote and strengthening Labour in certain areas.
Next week the market will focus central bank minutes and European PMIs on the calendar front. Details from the FOMC minutes will be scarce as the Fed has made it clear it’s on wait and see mode and Germany’s narrow escape from a technical recession will take some of the heat away from PMIs if they continue to disappoint.
Economic Events Next Week:
Monday November 18
- 8:30pm AUD Monetary Policy Meeting Minutes
Wednesday November 20
- 9:30am CAD CPI m/m
- 3:00pm USD FOMC Meeting Minutes
Thursday November 21
- Tentative GBP Monetary Policy Report Hearings
- 8:30am EUR ECB Monetary Policy Meeting Accounts
Friday November 22
- 4:15am EUR French Flash Services PMI
- 4:30am EUR German Flash Manufacturing PMI
- 4:30am EUR German Flash Services PMI
- 9:30am CAD Core Retail Sales m/m
The key story for the financial markets remains trade wars. The dollar remains fixated on growing concerns that a partial trade deal that was supposed to be finalized by now, may not get done until much closer to the holidays. The overall risk rally that stemmed from trade optimism that helped punish safe-havens and drive S&P 500 to record highs seems to be running out of steam, prompting many investors to expect softer economic data for the remainder of the year.
The dollar’s slide has eased somewhat after the Fed was effective in delivering a mid-cycle adjustment. The Fed sees the US economy having a favorable outlook, thus making the data dependent central bank unlikely to deliver further stimulus until we see a wrath of negative economic readings.
The week ahead will see investors look for a rebounding with housing statistics and preliminary PMI readings. The Fed’s Minutes will likely be a non-event after Fed Chair Powell’s two days of testimony did not stray from October 30th policy statement and press conference.
The Fed is on stand by awaiting either a drop in economic indicators or an end to the US-China Trade War. Trump tweets remain a risk as they can undo some of the hopes after the phase 1 deal was announced.
Mexican Peso Higher Despite Rate Cut by Banxico
The 25 basis points rate cut by Banxico did enough to keep the rate diferential between the US and Mexico, but with stagnant growth and low inflationary pressures there will be more cuts next year.The vote was unanimous but 2 out of 5 members of the board voted for 50 basis points.
The USMCA got a boost from Speaker of the House Nancy Pelosi, which appreciated the MXN. The peso is sensitive to trade headlines, and they will offset any risk aversion triggered by contagion fears as political instability grips Latin America USMCA ratification remains up in the air. The democrats will not want to give Trump an easy win, but on the other hand they also can’t afford to delay the trade deal.
Contagion risks from Argentina, Chile and Bolivia are low, but trade concerns (USMCA and US-China trade war) have taken their toll
Oil Higher on Trade Optimism
Crude has been trading in a tight range as the API pointed to a drop in inventories but the official data from the EIA showed a drawdown last week. The hopes of a trade deal between China and the US are slowly evaporating and taking all the momentum away from the black stuff.
The OPEC+ can only stabilize prices with their production limits, but in order for crude to rise beyond its current range a truce is needed between the two economic powerhouses. Remains vulnerable to global growth worries and further attacks in the middle east.
Gold Stable as Risk Events Keep Investors on Edge
Gold has regained some lost ground this week as Trump disappointed the market with his comments in NY. More details were expected or at least the same positive trade talk of a deal being close, instead Trump served his usual aggressive rhetoric against China, which deflated market expectations.
Gold as the de facto safe haven rose and continues to climb as uncertainty on the closeness of Beijing and Washington to a deal. Gold is facing a $1,480 support level, if trade talk becomes mixed again it could easily break above as investors will look to hedge their dollar exposures.
President’s Trump Impeachment Probe Starts Dividing Republicans
US Impeachment proceedings have gone pretty much as expected and have not seen any major shifts between Democrats or Republicans. Unless we start to hear Senate Republicans become critical of President Trump, we will likely not see an impeachment impact on financial markets.
The 2020 Democratic presidential contest remains chaotic. The field is supposed to be narrowing, but we could see more entries as Democrats become nervous the four frontrunners, Warren, Biden, Sanders and Buttigieg appear destined to lose to Trump. We are under 81 days till the Iowa caucus and we should start to see progressive candidates Warren and Sanders be tested. The impeachment process is underway and even if it’s not successful it could derail Trump’s reelection campaign and add uncertainty to the markets.
Boris Johnson Gets Brexit Party Boost but will not Reciprocate
The UK election campaigning has started and the Conservatives were this week given a huge boost after the Brexit Party decided not to run in the 317 seats they currently occupy. While this has boosted their chances of securing the majority needed to get Boris’ deal over the line, there is still the small issue of all the marginal seats that the Tories will be hoping to win this time around. If the Brexit vote is split in these seats, it could severely harm the Conservatives chances and even hand some to remain/second referendum candidates.
There is still time for Brexit party candidates to stand down or withdraw and there’s a good chance this is still a ploy by Nigel Farage to pressure the Conservatives to withdraw from leave seats they have little chance of winning. There’s a long way to go but this certainly goes down as a net positive week for Boris and negative for the others.
Soft Brexit remains very much alive and Johnson has a chance to make it a reality after Farage’s political move.Elections are a dangerous game and the stakes are beyond the usual democratic exercise.
Spanish Election Results Confirms Rise of Extreme Right in Europe
The Socialists and Podemos have made an important first step towards forming a government within days of another inconclusive election result. The two sides failed to agree terms after months of negotiations earlier this year but the rise of the right – most notably the Vox party which saw itself become the third largest party up from 24 seats to 52 – and the loss of a few seat for the Socialists clearly focused the minds and enabled them to overcome their differences. The two parties won a combined 155 seats, short of the 176 needed to hold a majority. The two parties will now seek support from other smaller parties but at the moment, another election is still a possibility.
The far right continues to advance in Europe as the protest vote turns against the center and the left.
South Africa
The SARB is not expected to cut interest rates at the upcoming meeting but the next 25 basis point cut is not too far away, with those polled by Reuters forecasting one in Q2 next year. Economic indicators continue to highlight difficulties in the economy with unemployment spiking earlier this year to stand at 29.1%.
S&P will review the country’s credit rating on Friday. With Moody’s the last to hold it in the investment grade category, for now, there’s only so much damage an S&P downgrade could do. If and when Moody’s does, the impact could be more significant.
Risk aversion has scared away investment, and if the US-China war continues it will keep putting downward pressure on the SA economy.
Europe
Draghi’s final meeting was more of a homage to Mario than anything else. There isn’t too much to be learned from the minutes which may come and go without much attention. The big policy announcements came at Draghi’s penultimate meeting, with QE restarting this month.
It’s Lagarde’s baby now. The new chief will be going deeper into uncharted waters where her diplomatic skills might be more needed than the depleted monetary policy toolkit at her disposal.
Hong Kong
Escalating violence, shootings, people set alight, there seems to be no end in sight. Rumours of a curfew being imposed this weekend. So far no official mainland intervention in law and order, but patience must be wearing thin.
Data confirmed technical recession in Q3, the first revision is due tonight, and it’s not going upwards. USD/HKD had a reprieve in October, given broad-based dollar weakness, but is already higher this week. It’s close to the upper band-trading limit of 7.85 amid reported capital outflows. The Hang Seng is feeling the pain, down for the first week in seven. The downside remains vulnerable.
China
Waiting on the signing of the US-China “Phase 1” trade deal, if it happens this month. Trump claims credit for the record levels for US stocks. China equities hit by the unrest in Hong Kong. There are no major data releases next week. The focus will be purely on the Phase 1 trade deal.
Any delay past November will be negative for the China50 index, bullish for USD/CNH.
North Korea
Off the radar for the moment, but an escalation in concerns is only a (targeted) missile launch away Off the radar as a geopolitical event, for now.
New Zealand
RBNZ held rates at 1% this week, a record low and surprised the assembling doves. RBNZ said nothing has changed, 2 rate cuts are still filtering through to the economy. Ready to cut if needed.
A number of NZ banks have now scaled back rate cut expectations to mid–2020 Kiwi soared after the doves were caught unawares. Market appears to be still short.
Australia
Three RBA cuts have reduced mortgage costs and as a result talk of housing bubbles has resurfaced again. New home sales turned positive in August and September with October’s numbers due on the 29th.
Today’s employment report for October was disappointing… RBA cuts being talked about, but not until Q1 2020 (60% probability, according to interest rate markets). Not an immediate concern, but the RBA kept rates at high levels for a couple of years to combat a Sydney and Melbourne housing bubble. Any obstacle to the Phase 1 US-China trade deal will put pressure on the commodity currency.
Japan
BOJ remains in wait-and-see mode (like for the past 10 years plus). There are no major data points next week. One eye on the US-China Phase 1 deal. US-Japan may be next.
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