Market movers today
Today and tomorrow, an informal EU summit is set to discuss Brexit and migration. At the summit, EU leaders could soften Michel Barnier’s negotiation guidelines in order to make it easier to reach a withdrawal agreement in Q4. Media reports suggest another high level summit in the course of Q4 to finalise the Brexit deal.
Markets will naturally focus on the likely retaliation measures from China in response to yesterday’s announcement from President Trump adding tariffs worth USD200bn to the Chinese exports.
We expect today’s UK CPI inflation data to indicate a headline inflation decline to 2.3% y/y from 2.5% y/y in July, in particular because the impact of GBP depreciation is fading. CPI core inflation is likely to have fallen to 1.8% from 1.9%.
There are no market movers in Scandi today, yet focus is set on tomorrow’s Norges bank meeting where we expect the first policy rate hike in seven years.
Selected market news
As expected, the Chinese government yesterday responded to the 10% tariff imposed by the US on USD200bn worth of Chinese goods by announcing retaliatory tariffs of 10% on USD60bn worth of US goods. Moreover, the Chinese Ministry of Commerce said that it has filed a complaint with the WTO over tariffs imposed by the US. In addition, China’s Premier Li Keqiang said he will not let the currency devalue to stimulate exports. Hence, China’s strategy right now appears to be to respond to US measures but without escalating tensions.
Risk markets seems to have shrugged off concerns about trade tensions and the rally in global equity markets has extended this morning led by Japanese and Chinese markets. The positive reaction in risk markets likely reflects that the actions from both the US and China have been less aggressive than initially feared. Markets will continue to focus on the US-Chinese trade war and there is clearly a risk that tension will escalate further.
The Bank of Japan (BoJ) kept its monetary policy unchanged this morning, and the policy balance rate and the yield target on 10-year Japanese government bonds was maintained at -0.1% and 0% (+/-20bp), respectively. The BoJ also maintained its forward guidance and left its asset purchases unchanged. The BoJ has clearly shifted to auto pilot mode after it announced some policy tweaks at the July meeting, and an unchanged signal from the BoJ today was fully expected. Hence, no reaction in USD/JPY or the Japanese fixed income market. PM Shinzo Abe is expected to win the LDP (Liberal Democratic Party) leadership election, which takes place tomorrow. The BoJ’s aggressive stimulus has been an important pillar of ‘Abenomics’, and given that Abe will continue as PM for several more years, political support for the BoJ monetary policy is likely to remain intact. We expect the BoJ to keep its current policy intact until the end of 2019 at least.
