By Deepta Bolaky
US-China Trade and Brexit Optimism
The weekend headlines have been positive on the trade talks and Brexit. The world two largest economies have reached a ceasefire and the US halted a tariff hike on US$250 billion on Chinese goods which were scheduled to take effect on Tuesday. China also agreed to buy around US$40 billion of US farm products.
The comments coming from the UK, Ireland and the European Union brought some glimpse of hope ahead of the EU Summit.
Crunch Week for Brexit
It is another crunch week for Brexit. Even though there is more optimism in the markets around Brexit than before, there is a lack of details on the Brexit negotiations. Market participants are likely going to monitor every development as talks will carry through on Monday.
The meeting in Washington resulted in a ceasefire which buoyed risk sentiment and helped Wall Street to finish strongly in positive territory late on Friday’s close. Trade optimism will likely continue to steer the markets at the beginning of the week even though the truce is largely anticipated to be temporary as both economies struggle to find a compromise on intellectual property and state subsidies.
“Phase 1” agreement is likely to be officially signed at a meeting of global leaders in Chile in November when President Trump and President XI Jinping will meet. Market sentiment was buoyed by the progress as if the agreement is completed and signed, it will be a significant forward step for the global economy that has been battered by the trade war.
Given the structural differences for key issues, it probably makes more sense to break the trade deal in stages. Such a move would bring some relief for the markets. We expect investors to keep monitoring developments on the trade front and other related news that could affect or forced either party to rescind the negotiations in different phases.
“It’s such a big deal that doing it in sections, in phases, is really better,” Mr. Trump said during a White House meeting with Liu He, China’s vice premier. “So you’ll either have two phases or three phases.”
The clock is ticking and we note that all parties involved are trying to avoid a hard-Brexit. The news coming out from the UK, Ireland and the European Union is more positive than previous weeks whereby the UK Prime Minister was keen to leave with or without a deal.
Despite the lack of substantial progress, the headlines over the weekend indicate that there might be a pathway to a deal, but there is still a significant amount of work to get there. It is another crucial week whereby it will be vital for the EU and UK to find a solution if they want the deal to be approved at the EU summit later this week.
Traders will likely monitor if the full legal text of the new proposal will be published, and the Queen’s speech on Monday which will include several Brexit related pieces of legislation. Investors are conscious that a deal might be too tight ahead of the EU summit and therefore, the prospects of an extension are not excluded.
The Pound had rallied on the positive developments, and the GBPUSD pair rose to 1.26 level on Friday. However, the price has stalled around the 1.2640 as market participants await for further developments.
Aside from geopolitics, it will be a busy week on the economic front with key data coming from various major economies. The economic releases out of China may switch the focus back on growth concerns amid the heat of the tariff war.
Monday: Exports, Imports and Trade Balance
Tuesday: Consumer and Price Index
Friday: Retail Sales, Industrial Production and Gross Domestic Product.
Even though the trade optimism and ceasefire may tamper the reactions of any disappointing figures, significant weakness will heighten concerns of a sharper downturn.
Eurozone and the UK
In the Eurozone area, ZEW surveys and the inflation data will be the main economic data that will be released. The data will help to build a broader picture of the Eurozone economy amid a global slowdown. The ECB Chief who has led the central bank for the past eight years took a big risk for its latest decision.
In the UK, the rally in the British Pound could face the headwinds of Brexit on its economy. Putting aside Brexit comments, the latest economic indicators have shown that its economy has borne the brunt of Brexit chaos. This week’s data will be watched for more clues on the health of the economy.
Monday will kick off with the Deputy Governor of the BoE. Tuesday will follow with the employment report – Claimant Count, Average Earnings and Unemployment Rate. Retail Sales and inflation data will be released towards the end of the week.
On Tuesday, the RBA minutes will be released and is widely expected to reiterate that the RBA will ease monetary policy again if support growth, full employment and the inflation target. The jobs report will follow on Thursday. We expect the unemployment rate to remain at 5.3% and a jobs growth of 10,000.
The latest data has shown some weakness in the US economy. So far, the Fed has cut interest rates as an “insurance” against global headwinds. Retail Sales will be eyed to determine the health of the US consumer and expectations of a rate cut as robust consumption. Some FOMC members were against a rate cut mainly due to a strong consumption level.
Housing data, Manufacturing surveys, and Fed speeches will also be released across the week.
|Tuesday, 15 October 2019|
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