The two big deals of the week – the U.S.-China trade talks and the Brexit impasse - appear to be going nowhere. Markets are on edge over both, soothed only by signals from the U.S. Federal Reserve Chairman Jerome Powell overnight that the Fed was open both to further interest rate cuts and a resumption of bond purchases to prevent a repeat of the recent money market and repo ructions.
U.S. futures markets now see an 85% chance of another quarter-point Fed rate cut on Oct, 30. And Fed easing may well be necessary given mood music before tomorrow’s trade talks in Washington.
Despite repeating that a deal is possible, and perhaps seeking leverage in the talks, the U.S. government has simultaneously upped the pressure on China on fronts beyond trade, from how it handles the violent street protests in Hong Kong to its treatment of Muslim minorities.
Overnight, the U.S. State Department imposed visa restrictions on Chinese government and Communist Party officials and widened its trade blacklist to include some of China’s top artificial intelligence start-ups – drawing angry responses from Chinese officials about U.S. interference in its internal affairs.
Wall Street stocks lost more than 1% last night, with the 1.55% slide in the S&P 500 the second-worst day of the past month, and the ViX volatility gauge jumped back above 20%. But partly due to Powell’s speech, the selling has eased since.
U.S. futures are up about 0.25% first thing on Wednesday and Asia’s main markets stabilised. Shanghai closed little changed, although Tokyo’s Nikkei and Hong Kong’s Hang Seng were down about 0.5%. China’s offshore yuan was firmer. MSCI’s all-country world stock index was down for the third day in a row, but only 0.1% in the red today.
The effect of the trade war on the world economy was underlined by new International Monetary Fund chief Kristalina Georgieva, who warned on Tuesday that the global economy was experiencing a "synchronized slowdown" that would worsen if governments failed to resolve trade conflicts and support growth beyond just using monetary policy.
European stock futures were flat to slightly higher before the open, after a torrid day on Tuesday made worse by the apparent breakdown in Brexit talks before next week’s European Union summit deadline for a deal. Sterling skidded to its lowest level in about a month against both the dollar and the euro and continued to probe lower on Wednesday.
EU officials made clear they thought UK PM Boris Johnson’s compromise proposals to change the existing withdrawal agreement were far short of what EU governments would accept — particularly in preventing physical customs checks at the Irish border and establishing who has the final say over how those provisions are met after Brexit.
Although UK legislation requires Johnson to seek an extension of the Oct. 31 Brexit date if no deal is forthcoming by next week’s summit, he continues to insist he will take the UK out of the EU regardless. It’s still not clear how he plans to square the circle.
Sterling took the heat again on Tuesday, but it remains largely within recent ranges. Markets still think there chances of a no-deal Brexit this month are less than 50%, and most now expect an election will precede Brexit in any form.
Bookies and prediction sites tally with that. Betfair online bookies and the PredictIt and Hypermind predictions and forecast trading sites still put the chances of no deal in 2019 at about 20%.
As to figuring the outcome of a snap general election, opinion polls differ widely. A report by the British Election Study on Tuesday showed that British voter volatility has never been higher and almost half the electorate are now considered to be floating voters willing to switch party allegiances.
Elsewhere, the dollar was higher on Wednesday and euro/dollar remained just below $1.10. Emerging-market currencies were down for a third day. Turkey’s lira was still under pressure after U.S. President Donald Trump warned earlier in the week that he would "obliterate" the Turkey's economy if its troops commit any abuses as they move into northern Syria.
On the European corporate front, European companies are expected to report a 3% drop in third-quarter earnings, worse than the 2.2% expected a week ago. That would be the third decline in a row, prolonging an earnings recession in Europe.
Shares in Plastic Omnium are expected to drop as the plastic processing group with business in the automotive and environment sectors reviews its targets. Dealers expects the shares to open down 3% to 10%. A solid update from Takeaway.com, which reported an 87% increase in third-quarter orders, should lift its shares and boost UK’s Just Eat.
Good-looking updates from Cropenergies, GVC, Codemaster and OMV mean all are seen rising at the open. And in another sign on how Hong Kong tensions are taking their toll on the luxury industry, reports that Burberry is braced for a 100 million-pound hit to sales are expected to send its shares down 1% at the start. After the market close today, LVMH will report its own update.
Meanwhile, China's state media criticised Apple for an app use by Hong Kong protesters. That weighed on Apple suppliers in China and could also dampen the mood for European companies like Ams and Dialog Semi.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —