Confusion appears to have replaced determination in markets trying to navigate the week’s political minefield in the United States and Britain.
Many investors are trying to stay focused on the trade war, or even more prosaic economic numbers and earnings projections, but the impeachment proceedings against U.S. President Donald Trump and a defeat for UK PM Boris Johnson in Britain’s highest court are still too murky to take positions.
One concern yesterday was that Trump’s political woes might see him double down on the tariff war with China by way of distraction, as per his United Nations speech on Tuesday. But instead he once again talked up the possibility of a trade deal on Wednesday, indicated China was buying U.S. agriculture produce and eased fears of tariffs against Japanese autos by insisting U.S.-Japan trade consultations would be completed within four months.
Along with some decent U.S. housing data, that helped Wall Street stocks recover most of Tuesday’s losses, and the S&P 500 ended 0.6% higher. But overnight markets turned flat as traders grew suspicious of the metronome of trade signalling and wonder how impeachment will play out for Trump’s re-election chances next year.
Asia markets were mixed, with Shanghai ending 0.6% lower and Tokyo, Hong Kong and Seoul all flat. U.S. and European stocks futures were flat. The whiplash movements of the week so far also left U.S. Treasuries directionless, with 10-year yields hovering just below 1.7% first thing.
The yield curve between three months and 10 years remains negative by 20 basis points. And any optimism on U.S.-Asia trade was offset in Europe by an unconfirmed report the World Trade Organization was likely to authorise U.S. tariffs on European goods imports because of illegal state aid to Airbus.
In currency markets, the dollar continues to push higher against both developed and emerging-market currencies.
Sterling’s interpretation of PM Johnson’s next steps and the prospects for either a no-deal Brexit or a snap election left it as much as 1% weaker on Wednesday, wiping out gains made on the Supreme Court decision. Some argue that the recall of parliament will make it harder for Johnson to take Britain out of the European Union with no deal on Oct 31.
But he continues to insist he will not seek an extension to the deadline and continued to push for a snap election instead. Markets are increasingly wary of making bets on direction and are monitoring the damage to economic confidence.
Attention may turn to Brussels on Thursday, with the EU's Brexit negotiator Michel Barnier due to brief EU states and the European Parliament’s steering committee on this week’s talks with Johnson in New York. The pound was hovering around $1.2350 first thing.
Apart from Brexit, other European markets continue to parse recession signals from Germany, but will be looking for policy differences within the European Central Bank as its presidency changes hands. Germany's appointee to the ECB board, the outspoken policy hawk Sabine Lautenschlaeger, quit late on Wednesday, in what appeared to be further backlash against the ECB's latest stimulus measures.
Markets are also taking note of more upbeat French economic numbers and the shifting policy mix. The French government will today present its 2020 budget, with the positive business and consumer response to fiscal loosening over the past year something likely to noted in Berlin. Euro/dollar recovered a little of Wednesday’s slide first thing but remained stuck below $1.10.
In the European corporate world, Ericsson shares are seen opening 2% lower after the Swedish telecom equipment maker said its third-quarter results will be hit by a 12 billion Swedish krona ($1.23 billion) provision it was making for U.S. investigations linked to the company's compliance with the U.S. Foreign Corrupt Practices Act.
Pearson shares are seen down 3% to 4% after the British education company said full-year profit is expected to come in at the bottom of its guided range because of weaker-than-expected trading in its U.S. higher education courseware business.
Imperial Brands shares are seen opening 5% to 7% lower after it slashed its full-year outlook. The news is likely to weigh on rival British American Tobacco's shares.
British Airways owner IAG is seen sliding 3% as it warns on profits after pilot strikes led to thousands of cancelled flights and disruptions at the airline.
Dutch bank ABN Amro is seen down 3% after it said it is subject to an investigation for failing to prevent money laundering over a long period.
U.S. chemical company HB Fuller’s warning overnight is likely to put pressure on shares of European rivals Henkel and Sika.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —