US equities and yields shot up on Friday on news of a partial trade agreement between the US and China before giving back some ground as the limited scope and details of this deal came into focus. The S&P 500 was up 1.9% at one point before closing up 1.1% on the day and only 0.6% on the week. The Dollar was down 0.5% on the week, near the bottom of a 2% range in place since mid-August.
China agreed to buy more US agricultural products and promised to be more “transparent” about currency intervention and intellectual property protection and to open its financial sector. The US in exchange agreed to temporarily postpone tariff hikes on imports from China originally planned for December. However, this is seemingly little more than a cordial truce, with limited firm commitments, while both sides continue to work on larger trade issues including dismantling existing import tariffs.
Earlier in the week, Fed Chairperson Powell announced the potential for a tactical quantitative easing program involving the purchased of T-bills and unsurprisingly short-end yields dropped but he made clear this would not be repeat of the Fed’s post-financial crisis large-scale QE program. He painted a reasonably positive picture of the US economy, including the strength of consumer demand and sustainable US growth. But he also once again flagged geopolitical risks, that the Fed was not a pre-set course and that future policy decisions remained data-dependent. Markets are pricing in 32.5bp of Fed rate cuts between now and year-end, including 19bp of cuts at this month’s policy meeting, down from 41bp a week ago.
Sterling volatility exploded last week as Brexit negotiations enter a potentially defining phase. Sterling was relatively stable early in the week, showing little reaction to weak BRC retail sales data and a decent pick-up in UK GDP growth in August to 0.3% mom. Sterling then surged on Thursday-Friday on news that material progress on Brexit negotiations between the UK and Republic Ireland had paved the way to detailed negotiations between Boris Johnson’s government and the European Union. GBP/USD shot up nearly 4% in the space of 24 hours – its largest daily move in over a decade – to close to 1.27.
However, over the weekend, GBP/USD has fallen back to 1.257 with the reality of the task ahead coming into focus. The Democratic Unionist Party (DUP) is demanding that Northern Ireland remain in the customs union with the UK while the EU’s chief Brexit negotiator, Michel Barnier, tempered optimism that a Brexit agreement could be reached before the European Union Council Summit on 18-19 October. Markets are pricing in 11bp of Bank of England rate cuts by May 2020, versus 25bp a week ago.
Price action in the Euro, Australian and Kiwi Dollars was limited last week, with the three currencies broadly unchanged in trade-weighted terms. However, the Kiwi Dollar has shed almost 0.4% since Friday.
The up-tick in global risk appetite saw the safe-haven Swiss Franc underperform for the second week running. It was down 0.7% in trade-weighted terms to its lowest level since early August, which may take some of the pressure off the Swiss National Bank to cut rates.
