Markets
Markets remained focused on any concrete news from the US China trade talks Friday. White House economic advisor Larry Kudlow had revived investor hopes that a first phase deal could be imminent. However, nothing has been decided yet and there were still very few details on how such a deal might look like. So, the comments were a source of optimism but in a way they also paralyzed activity in some parts of the markets. The major US equity indices again touched new all-time record levels. The reaction in FX and on the bond markets was much more moderate. US eco data, including the New Empire manufacturing survey, the October retail sales and the US production data in theory also had potential to move the markets. The data in general were slightly softer than expected, but shouldn’t change the Fed’s wait-and-see approach. The US yield curve showed a limited bear flattening with yields rising between 1.9 bp (2-y) and 0.5 bp (30-y). German yields rose between 0.7 bp (10-y) and 2.6 bp (30-y). On the FX market, the dollar showed tentative signs for topping out since mid-last week and this process continued on Friday. EUR/USD already traded with an upside bias during the European session and soft US data supported further gains. The pair close the day at 1.1051. The equity rally helped USD/JPY to rebound in the 108 big figure (close at 108.80). Sterling held strong (against the euro). The UK labour party launched high profile proposals, including on nationalization of some key parts of the economy. However, sterling investors stayed confident as the Conservative party is still seen having the best cards to secure a majority at the December 12 ballot.
During the weekend, ongoing tensions in Hong Kong remained a source of uncertainty, but the impact on global markets remains limited. Telephone calls between high level US and China officials were again labeled as ‘constructive’, but with still few details on what the (expected/hoped for) deal might look like. The PBOC lowered the 7-day repo rate by 5 bp to support the economy after a series of poor eco data of late. Asian equity markets are mostly trading in positive territory. The yuan is trading marginally softer at USD/CNY 7.016. Later today, the eco calendar is thin. The US NAHB housing index and the US TIC investment flow data probably won’t have much lasting impact. We expect more technical trading for core US and German bonds as long as there is little concrete news the trade talks. The combination of a positive risk sentiment and slightly softer US data helped a bottoming of EUR/USD. Some further technical gains are possible, but we don’t see an imminent trigger for a big directional move. EUR/GBP is paralyzed in tight range near 0.8560 as markets watch the debate in the UK election campaign.
News Headlines
China’s central bank unexpectedly trimmed the 7-day repo rate by 5 bps today, a key interest rate, for the first time since 2015. The cut follows on from last week’s MLF cut and stirs speculation that further stimulus is on the way for the world’s second-largest economy.
China’s VP Liu He, the country’s key negotiator in trade talks with the US, spoke with US Treasury Secretary Steven Mnuchin and Trade representative Robert Lighthizer on Saturday. The trade negotiators held ‘”constructive discussions” to address each side’s core concerns of phase one of the trade deal and agreed to remain in close communication, the Chinese Commerce Ministry reported.
The leaders of UK’s major political parties will go head-to-head in their first debate this week. PM Boris Johnson will try to win business leaders to his side today by offering them tax cuts and tax reliefs as an olive branch for the disruption and paralysis caused by Brexit..
