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Chinese rally provides little boost elsewhere

Surging stocks in China hasn’t provided much of a catalyst for similar moves elsewhere at the start of the week, with local investors seeing recent comments from various officials as evidence that the private sector will be protected, despite heightened risk from a trade war with the US.

President Xi added his name to the list of those vowing to support private firms over the weekend, giving investors reason to pile back in to battered Chinese stocks. The Shanghai Composite had fallen more than 30% from its peak this year prior to Friday’s comments, which has been the clearest sign so far that tariffs are biting.

The tariffs may not yet be taking their toll on the trade data but as long as the stock market continues to take a beating and growth stalls – as the data last week showed – Trump will be confident that the measures are effective and continue to threaten to double down until he wins concessions. There’s still a long way to go in this particular trade spat it would seem.

China equities lead the pack as US indices lag

Italian budget and Brexit enough of a headache for EU

Europe has its own problems, without having to worry about hostile trade policies of the world’s two largest economies, as Italy prepares to defy the EU on its budget and risk sanctions and the UK pushes negotiations to the wire over the backstop for the Northern Irish border.

Reports over the weekend suggest Italy is not willing to budge on its 2.4% deficit target and will instead conduct regular monitoring to ensure it doesn’t exceed it. This is unlikely to satisfy the European Commission but at the same time, it will be extremely reluctant to impose financial sanctions and fuel the already growing populist movement in the country that has already delivered a Eurosceptic coalition government.

source: tradingeconomics.com

We could hear from the EC as early as Tuesday, which will likely come as a request to amend and resubmit the 2019 budget at this stage.

Asia market update: US-China digging in for the long haul?

Falih comments don’t provide much comfort for oil traders

Comments from Saudi Energy Minister Falih this morning don’t appear to have provided much comfort to oil traders, despite his insistence that a repeat of a 1973-style oil embargo is not their intention and that production will likely go up to 11 million barrels per day in the near future.

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Source – OPEC Monthly Oil Market Report

This comes as people become increasingly frustrated with the handling of the apparent Khashoggi murder, with Trump appearing very keen to accept any explanation that removes any link whatsoever to the Crown Prince. Trump has been desperate not to threaten the relationship the US has with Saudi Arabia or the arms deal that he signed with the Crown Prince not too long ago.

It would appear the route forward has already been laid and the explanation – no matter how unbelievable many find it – will be accepted by the White House and the whole saga will attempt to be brushed under the rug. This may prevent a series of sanctions and counter measures between the two countries that could disrupt oil supply and drive prices much higher and Trump may even believe he can use the situation to push the Saudi’s to increase output as sanctions against Iran kick in, or is that the cynic in me?

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OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: PM faces Brexit transition backlash, Trump shifts tone on Saudi crisis, UK inflation lower than expected, China growth lowest since financial crisis.

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    Sentiment improves even as China GDP disappoints

    European equity markets are poised for a more positive open on Friday, buoyed by the gradual improvement in Asian markets overnight following a shaky start.

    Sentiment across the globe has remained cautious at best this week but all things considered, I think investors will be heading into the weekend somewhat relieved. If this time last week – when investors were weighing up the potential fallout of a couple of really bad days for the markets – you offered them a somewhat shaky week but one that ended roughly where it started, they would have snapped your hand off.

    Chinese data over night threatened to sour things heading into the weekend, with growth in the third quarter slipping to 6.5% from 6.7% and missing expectations. And that was certainly looking the case early on but perhaps the better than expected retail sales and fixed asset investment numbers, as the government looks to support the faltering economy in the face of US tariffs, offset the GDP disappointment. This was accompanied by offers of support for non-state backed listed company’s from the central bank and others, which likely eased concerns about the recent slowdown and stock market declines.

    China offers verbal support as growth hits lowest in nearly a decade

    Positive tones coming from Brussels as May offers another concession

    Theresa May’s Brussels visit may not have been the complete waste of time it was looking even 24 hours ago, with leaders suddenly sounding more optimistic that a deal can be reached. It would appear that May’s transition extension proposal has sat better with Brussels than it inevitably will do in London, with some of the more staunch Brexiteers already voicing their disdain for such a move.

    Still, these are the sacrifices that the PM is consistently being forced to make in order to progress talks and avoid a no deal Brexit, something some of her louder colleagues at home don’t have to worry about. With time running out though, I struggle to see how this really resolves the problem of the Northern Irish border and the backstop unless further concessions are made. The EU may now have a reputation for eleventh hour deals but as the deadline nears, traders are not going to bank on another and the nerves will start to creep in.

    Asia Market update: China data

    Italian borrowing costs his four and a half year high as budget talks begin with Brussels

    As if Brexit isn’t enough of a headache, the EU has another fight on its hands as the populist coalition government in Italy attempts to circumvent the blocks budget rules in order to follow through on campaign promises that are, unsurprisingly, much easier to make than deliver on.

    With discussions now underway and Italy having until Monday to respond to the European Commission’s concerns about its budget plans, both sides would be wise to not let this get heated. Brussels will want to avoid providing bait to the eurosceptics while the government will have one eye on the bond markets at all times, with Conte already in discussions with the ratings agencies in a desperate attempt to avoid a downgrade.

    That would be catastrophic for the government’s plans and would likely trigger another spike in its borrowing costs, with the 10-year yield already at a four and a half year high and the spread over Germany at a five and a half year high.

    Italy 10-Year Yield

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    Source – Thomson Reuters Eikon

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    Market sensitivity to Fed hikes evident again after minutes

    We’re seeing mixed trading in Europe so far on Thursday, following a less than impression in Asia overnight – particularly in China – while US futures are pointing to further losses on Wall Street which saw some late weakness on Wednesday.

    The Fed minutes caused further unrest on Wednesday, as they reaffirmed the widely held opinion at the central bank that interest rates have further to rise including another hike this year. Why this came as such a surprise is something of a mystery as the minutes didn’t appear to deviate from the message after the meeting when the central bank raised interest rates and removed the reference to policy being accommodative.

    This may instead be a reflection of the fragility of financial markets right now and sensitivity to higher interest rates which appeared to be behind the recent sell-off. In many ways, the minutes are outdated as they don’t take into consideration the current unstable market environment which, if it persists, may encourage policy makers to take their foot off the gas a little. One thing is clear, the minutes will not make Trump happy after a series of public attacks against the Fed for raising rates in a manner that undermines his growth goals.

    DAX edges higher as German inflation creeps higher

    May risks wrath of Brexiteers after Brussels visit

    It’s not been a great 24 hours for the UK, with Theresa May’s speech in Brussels – which she hoped would end the impasse between the two sides – creating more uncertainty, as the proposed emergency November summit was seemingly abandoned and the discussion switched from a deal later this year to a potential extension of the transition by “a matter of months”. This is likely to infuriate the Brexiteers within the Conservative government, if it turns out to be accurate, and could accelerate her removal as Prime Minister.

    GBPUSD Daily Chart

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    May’s position is already hanging by a thread and if reports are true that four more letters would trigger a vote of no confidence, then her days may well be numbered. That said, there’s nothing to say there’d be enough votes in parliament to remove May which may explain why they’ve instead chosen to berate her plans from the periphery for months, rather than replace her with a Brexiteer that can work towards the Canada+++ deal they seem to favour. It’s this that may explain why the pound hasn’t fallen too far on the reports, with an extended transition maybe even being seen by some as beneficial as it keeps the UK tied to the EU for longer and reduces the possibility of a no deal Brexit.

    Aussie gains as unemployment hits 6-1/2 year low

    Decline in UK retail sales expected after bumper summer

    The bad news for the UK was compounded this morning by data showing consumer spending in September slipped even more than expected, with retail sales falling by 0.8% compared to August. It’s worth noting that the weaker showing in September is probably more a reflection of the bumper summer the UK has just experienced, with good weather and World Cup fever encouraging the public to loosen the purse strings a little.

    UK Retail Sales (YoY)

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    This was never likely to last in such a challenging environment for the consumer, with real wages having spent most of the last 18 months falling as the post-Brexit referendum sell-off in the pound pushed inflation above earnings growth. These things tend to even themselves out so a slowdown in spending in the run up to what is typically an expensive time of year for the consumer doesn’t come as a surprise.

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    Fed minutes in focus as markets rebound following sell-off

    US futures are trading slightly in the red on Wednesday, paring gains from the previous day as risk appetite continues to improve.

    A decent rebound in the US on Tuesday on the back of strong earnings numbers has gone some way to allaying fears about last week’s sell-off. The results are a timely reminder about the strength of the US economy right now and despite the large amount of underlying risk that still exists, investors have plenty to be optimistic about.

    Considering the fact that a major contributor to the sell-off appeared to be rising US bond yields – which have come off as risk appetite has returned – today’s FOMC minutes should be very interesting. Given the events of the last couple of weeks, there is a chance that the minutes are a little outdated, but that won’t stop people pouring over them for clues about where exactly we are in the tightening cycle and how much further there is to go.

    Little hope for Brexit breakthrough at EU summit

    Powell was a primary catalyst for the spike in yields a couple of weeks ago when he declared that we’re not yet near the neutral rate and could go beyond, which flies in the face of the belief of many that we’re in the latter phase of the tightening cycle. It will be interesting to see whether others share the views of Powell, although we may be better informed by the comments of the many policy makers that are speaking this week, including Lael Brainard today.

    May heads to Brussels as patience wears thin on both sides

    For the UK, this week may be dominated by what’s happening in Brussels but the current state of the economy will also be a focal point for traders, with today’s CPI data being the second of three notable releases.

    UK CPI Inflation

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    Inflationary pressures moderated once again in September after a brief summer spike that accompanied a surge in activity as consumers made the most of the good weather and the country’s unexpected World Cup success.

    Dollar in holding pattern; Asian equities follow Wall Street

    The return of grey skies and dark evenings has been a timely metaphor for the mood in Brussels right now, with good will wearing thin and the two camps becoming increasingly hostile towards each other despite only a small number of issues remaining. Theresa May heads to Brussels today in the hope of bridging the divide over these issues but any agreement this week is extremely unlikely with attention now switching to an emergency summit in November.

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    May heads to Brussels as no deal preparations continue

    Risk appetite appears to be gradually returning to markets following strong earnings-driven gains in the US overnight as attention now shifts to Brussels were Brexit talks will continue.

    All eyes in Europe will be on the EU summit over the next couple of days as Theresa May heads to Brussels to try and break the impasse on the Northern Ireland border and the backstop arrangement. As the pressure has increased and the deadline neared, relations appear to have deteriorated rather than improved which has been worry but I still believe a deal will come, just not this month.

    The EU has become renowned for its 11th hour deal making and I expect these negotiations to proceed in much the same way. For me, it’s the prospect of a deal not getting through parliament that represents the greatest risk rather than the leaders of the 28 deciding to suddenly abandon talks and shoot themselves in the foot in the process. We will hopefully be a lot clearer on the prospects of a deal by the end of the week.

    Dollar in holding pattern; Asian equities follow Wall Street

    Oil stable for now as Trump seeks to diffuse Saudi tensions

    Oil prices appear to have stabilised a little in recent sessions after coming off their highs earlier in the month. Iranian sanctions have contributed strongly to the rise in oil prices in recent months but global growth concerns over the last week or two has clearly taken some of the heat out of the rally and at the very least, been the catalyst for some profit taking.

    Brent Crude Daily Chart

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    The disappearance of journalist Jamal Khashoggi threatened to heighten tensions between the US and Saudi Arabia, which immediately drew attention back to oil as many saw it as being a potential weapon against US sanctions. But this was short-lived, with Trump clearly going out of his way to diffuse the situation rather than take his usual more combative approach, in a clear sign of his lack of appetite for a confrontation with Riyadh.

    Asia market update: Focus on Yuan

    Trump increasingly frustrated with the Fed

    Trump once again weighed in on the central bank on Tuesday, claiming it is his biggest threat and that he’s not happy with what it’s doing as the inflation numbers are very low. Trump has repeatedly tried to pile pressure on the central bank to slow its rate hikes while claiming to respect its independence so the latest attack comes as no surprise.

    And while the dollar has often softened in response to his comments, I don’t yet see them as a real risk to the central bank’s independence and we’re yet to see any evidence that it’s having any impact whatsoever on policy making. In fact, it’s simply another attempt by Trump to lay the groundwork for future finger pointing in the event that the economy falters, just as he did at the first sign of weakness last week.

    The Fed minutes will likely highlight the Fed’s determination to plough on later on today, with the central bank having previously alluded to one more hike this year and a few more next. Given everything that’s happened since the meeting though, I wonder whether the minutes are already outdated and in fact, the comments we’ll get over the course of this week – including from Lael Brainard today – will be more relevant.

    Economic Calendar

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    It’s been another turbulent week in FX markets with last week’s sell-off suitably spooking investors, Saudi Arabia causing a stir following allegations of murder at its embassy in Turkey, Brexit talks stalling and Italy risking the wrath of the European Commission after submitting its budget. Senior Market Analyst Craig Erlam discusses all of these and more in this week’s webinar.

    Craig also gives his live analysis on EURUSD (16:37), GBPUSD (18:09), EURGBP (20:05), AUDUSD (21:56), USDCAD (24:25), GBPCAD (29:37), NZDUSD (30:14), USDJPY (31:05), GBPJPY (31:50) and EURJPY (32:40).

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