LCG: Markets on emotional roller-coaster over US-China, Brexit talks

LCG: Markets on emotional roller-coaster over US-China, Brexit talks

Brexit Currency Trade conflict

Global markets are reassured by hints that the US and China could eventually reach an interim deal after US President Donald Trump said the first day of Washington negotiations went ‘very well’. US stocks swung higher in New York; the S&P500 (+0.64%), the Dow Jones (+0.57%) and Nasdaq (+0.60%) closed Thursday’s session in the positive territory.

US equity futures followed up on New York gains, as Asian stocks edged higher.

Gold slipped below the $1500 an ounce.

Oil gained, energy (+1.39%) and mining stocks (+1.25%) bounced in Sydney.

But FTSE futures (-0.64%) swam against the tide, as the pound jumped 2% against the US dollar and the euro on the sudden optimism regarding the possibility of a Brexit deal ahead of the critical 17-18 October summit.

Hang Seng advanced 2.16% as the trade optimism between the US and China brushed aside concerns about the Hong Kong protests ahead of the weekend. Gains in Shanghai’s Composite remained timid.

Sovereign bonds sold off across all continents. The US 10-year yield advanced past 1.67%.

Regardless of the present optimism, it is important to keep our feet on the ground. Positive news does not necessarily mean that China would get away with more tariffs on its US exports as scheduled for next week, unless both parties explicitly state the contrary.

Pound jumps on Brexit optimism. How solid are recent gains?

Yields in the United Kingdom jumped the most after Boris Johnson and Irish Premier Varadkar said in a joint statement that they saw a ‘pathway’ to a possible Brexit deal. The 10-year gilt yield rose 12.7 points, as the pound jumped to a two-week high against the US dollar, despite a meaningful decline in Britain’s industrial and manufacturing production in August.

Cable cleared the 100-day moving average (1.2410) and advanced to 1.2469. But offers remain dominant near the 1.25 handle on lingering uncertainties about what to do with the tricky Irish border.

The euro threw itself above the 1.10 barrier against the US dollar and saw a distinct support at this level in the overnight trading session.

The euro-pound plunged to 0.8830 from 0.9020.

But, how exactly the leaders plan to solve the Irish customs puzzle remains blurry. Boris Johnson proposed limiting custom checks away from the Northern Ireland border, while Varadkar responded that any custom checks inside Ireland would threaten the peace within his country. Dismissing custom inspections in Ireland would mean that goods could be smuggled from the UK to the EU and vice versa. One possible solution to avoid that would be leaving Northern Ireland out of the UK’s custom zone. But this would see a solid resistance from many policymakers, especially from Democratic Unionists.

We do not want to be a wet blanket, but the optimism over yesterday’s statement could rapidly fade, if the European leaders don’t adhere to what Irish Times called a ‘very significant movement’ on the Irish border enigma. Today’s meeting between Brexit Secretary Barclay and EU’s chief negotiator Barnier should throw some light on whether the recent Brexit optimism has a solid funding, or it was just a flash in the pan.

The two-week risk reversals in pound-dollar, which show the call option premiums over put option premiums spiked to the highest on Bloomberg’s record since 2005, as traders increased upside hedges on a heavily and negatively skewed pound market.

Alas, British blue chips will likely feel the pinch of a relatively expensive pound at today’s open.

The FTSE 100 is set for a negative open on the back of a strong pound, but the DAX eyes a move above 12200 in Frankfurt, given that an eventual trade deal between the US and China, and a reasonable Brexit agreement could improve the investor mood in German stock markets.

Opening calls

FTSE to open 22 points lower at 7164                  

DAX to open 44 points higher at 12208