Market recap: Equities fall and safe havens rise. Earnings season kicks off this week
US equities retreated on Monday, after China declared that further talks are required to iron out the details of the partial trade pact with the US that was announced on Friday. Meanwhile, US Treasury Secretary Steven Mnuchin claimed tariffs scheduled for December 15th will still be introduced if the new deal has not been rubber-stamped by then. The DJIA fell 0.11%, the S&P 500 pulled back 0.14% and the Nasdaq lost 0.10%.
Safe haven assets responded well to the news. Gold climbed 0.42% and the Dollar Index rose 0.12%. The yen gained against the greenback, with USD/JPY falling 0.21%. US Treasury yields rose slightly, with two-year yields losing 1bps to end at 1.58% and 10-year yields falling 3bps to 1.70%.
Asian markets were also resilient, with major indices opening higher on Tuesday morning. The Nikkei opened the week 1.21% (markets were closed on Monday for a bank holiday) and the Straits Times Index remained flat on open, inching up 0.06%. The Hang Seng Index opened 0.33% higher but retreated later during the day.
Earnings season starts this week, with reports from major banks scheduled to come out later today. Notable companies reporting today are Citigroup, JPMorgan Chase & Co, Wells Fargo and Goldman Sachs.
Today’s analysis: Johnson and the EU are still trying to thrash out a Brexit deal this week
The pound surged towards the end of last week, after British Prime Minister Boris Johnson and Irish counterpart Taoiseach Leo Varadkar claimed a Brexit deal is possible after a recent meeting. EU leaders are set to meet at the European Council Summit in Brussels this week on Thursday and Friday, October 17th and 18th. While Brexit is on the agenda, the EU has indicated that only discussions regarding a finalised deal will take place during the summit, and there will be no negotiations on the details of the deal itself. EU leaders also recently indicated that although talks between the EU and the UK have been positive, a finalised deal is still some way off. Johnson’s government has yet to find a solution to the Northern Ireland backstop issue, for example. Sterling retreated on the news on Monday, with Cable losing 0.47%.
Although the chances of a Brexit deal have improved, the main problem now is there is little time left to finalise it before the summit. Johnson may therefore need a short extension to the recently introduced Benn Act (a law introduced in the UK to prevent a no-deal that states a Brexit deal must be in place by October 19th) if more time is needed. If a deal is agreed ahead of the summit, Johnson will also most likely find more support in the House of Commons, meaning MPs will probably approve his exit plan. Politicians that were unsupportive of former British Prime Minister Theresa May’s Brexit proposals have indicated they will support Johnson’s new deal, in part because they want to avoid sending the British public back to the polling stations to vote at a second Brexit referendum (an idea recently mooted by members of the government’s main opposition party Labour). Investors, though, are still curious about the consequences of no deal being agreed by October 19th: will Johnson simply try to ignore the Benn Act and take the UK out of the bloc without a deal on October 31st?
We believe there will be more positive developments regarding Brexit this week, but a deal will not be ready in time for the summit, and Johnson will be given a short extension to the Benn Act. Should this happen, sterling could strengthen, as chances of a no-deal Brexit are likely to fall to 10% (from current levels of roughly 24%) and uncertainty surrounding the economic climate for UK and EU businesses will subside. GBP/USD may possibly rise past 1.266’s levels, to range between 1.266 and 1.275.
*Source: ADSS, TradingView
Bulls are currently in possession of GBP/USD, as the greenback weakened against major currencies after the announcement of the partial US-China trade pact on Friday. But GBP/USD dipped slightly on Monday, as the Relative Strength Index (RSI) indicated possible overbuying from the market. If there are positive developments ahead of the summit, we may see bears retreat more, as the bulls push past the resistance level of 1.266’s level, possibly reaching 1.280’s levels in a best-case scenario.