October 14, 2019 / 7:52 AM / a month ago

Daily Briefing: Light at the end of the tunnel?

LONDON (Reuters) - Is there light at the end of the tunnel? Despite all the optimism generated by breakthroughs last week on both the U.S.-China trade war and Brexit impasse, the mood in world markets on Monday was still laced with caution about an imminent resolution to either issue.

Brexit Secretary Stephen Barclay poses with European Union chief Brexit negotiator Michel Barnier ahead of a meeting at the EU Commission headquarters in Brussels, October 11, 2019

Friday saw the best day for MSCI’s all-country world stock index in more than two months, and the second best since Jan. 4. Sterling surged to is best levels in three months against the dollar and five months against the euro on hopes an elusive Brexit deal would result from intensive “tunnel” negotiations between the European Union and UK officials ahead of Thursday’s EU summit in Brussels.

Risk appetite was whetted further late on Friday after signs of a partial trade deal between Washington and Beijing that averted Tuesday’s planned tariff increase on some $250 billion of Chinese goods to 30% from 25%, with renewed commitments from Beijing to purchase U.S. agricultural goods and vague commitments on currency stability and protecting intellectual property.

Ten-year U.S. Treasury yields jumped above 1.76% for the first time in three weeks, with the yield curve between 3 months and 10 years turning positive for the first time in five months. Yet, duped by false dawns on both long-running sagas many times before, investors were wary of getting carried away too soon.

Although Tuesday’s tariff increases have been avoided, none of the past tariff hikes were reversed nor was the threat of further hikes in December. Talks now merely move on to the next stage, building to next month’s meeting between U.S. President Donald Trump and China’s President Xi Jinping at the APAC summit in Chile.

And the damage being wreaked by the trade war was on display again on Monday with news of bigger-than-expected annual contractions in Chinese exports and imports last month and a sub-forecast Singapore GDP reading for the third quarter that was met with the first interest rate cut there in three years.

With Tokyo markets on holiday and U.S. markets partially closed later, other major Asia bourses continued their cautious optimism. After gains of about 1% on Wall St on Friday, Shanghai and Seoul’s equity benchmarks added just over 1% earlier today, with Hong Kong stocks up slightly less than that.

China’s offshore yuan strengthened to its best levels in almost a month. The dollar’s DXY index, which has tended to benefit from the trade war, recovered some ground first thing after two days of steep losses last week. Euro/dollar slipped back, clinging on just above $1.10.

And much like the lukewarm new week reception to the U.S.-China trade news, sterling gave back about 0.6% of Friday’s jump first thing Monday. The latest reports suggest little additional progress was made over weekend negotiations, with EU Brexit negotiator Michel Barnier signalling there was some considerable distance between the two sides and that there may not be enough time to seal an agreement by the summit on Thursday-Friday.

Other reports concentrated on resistance among pro-Brexit groups and Northern Ireland’s DUP to the outlines of the slightly confusing new proposals that see Northern Ireland remaining in a UK customs area but with no border checks with the EU on the island of Ireland.

There was also speculation that the UK parliament may reject the deal next Saturday when it meets after the EU summit and possibly even seek a referendum on the deal. And some pointed to talk the EU may schedule a second summit after this week but before the Oct. 31 Brexit deadline. All the potential hurdles knocked the pound back a bit, although the switch in longer-term optimism was still clear.

Even before the breakthrough last week, data showed speculative short positions on the pound had been cut back further while in the options market there is now a premium on one-month calls on sterling over puts for the first time since January 2018.

Elsewhere, Turkey’s lira continued to weaken to its lowest levels since June as Turkey’s deepening military offensive into Kurdish areas of Northern Syria brought widespread international condemnation and threats of sanctions from the U.S. Congress while Kurdish forces have reportedly sought help from Syria’s army to counter the attacks on their towns and villages.

A Syrian rebel tank carrying soldiers leaves their base near Tal Abyad, Syria October 13, 2019

Stock markets more generally are keeping a close eye on this week’s start to the Q3 earnings season, with many of the big U.S. banks reporting on Tuesday and Wednesday.

On European corporate front, the much-anticipated Q3 season is about to begin in earnest but it’s still too early to say whether it will amount to a painful reality check if the macro gloom has made its way into corporate profit.

In the meantime though, France’s BIC update was grim on Friday evening. Elsewhere, Sunrise is expected to rise after Liberty Global offered to buy 500 million francs of its shares.

There was some disappointment with Volkswagen denying plans to sell or IPO Lamborghini and clearly bad news for Daimler which has to recall hundreds of thousands of Mercedes-Benz diesel vehicles.

Some M&A with French energy giant Total buying a 37.4% stake in India's Adani Gas and SocGen scraping plans for a securities JV in China in favour of a wholly owned business.  

— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —

Writing by Mike Dolan; Editing by Alison Williams

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