Positive trade-war headlines keeps sentiment

Sentiment swings as markets prepare for trade-talks

The hot-to-cold nature of trade-war headlines continued yesterday. At least on the surface of things, despair turned to hope once more, after reports were released that China is willing to accept a partial trade-deal. This immunized market participants, it would seem, from the uncertainty elicited by increasingly complicated US-Sino relations. US Federal Reserve Minutes were also released, and did enough to assure market participants that further rate cuts could be plied to the US economy if required. While in the day ahead, trader attention turns primarily to US-China trade-talks, but also to key UK GDP figures, and US CPI data tonight.

Happy headlines send stocks rallying

After what was a soft day for Asian markets, which saw the ASX 200shed 0.7%, market sentiment was juiced for European and North American trade, on headlines that read “China [is] open to partial U.S. trade deal despite tech blacklist”. That jolted stock indices higher overnight, with the S&P 500 recovering over 1%, and the DAX and FTSE 100 rallying 1% and 0.3%, respectively. This all happened on another low activity, suggesting there lacks a substance behind the move. There are few allusions in the market the swings in market pricing off the back of trade-war headlines amounts anything more than noise.

US-China talks limited by zero-sum game

In the bigger picture all happened on another low activity, suggesting there lacks a substance behind the move. There are few allusions in the market the swings in market pricing off the back of trade-war headlines amounts anything more than noise.e, however, and a tentative olive branch extended by the Chinese, on balance, raises the chances marginally of trade-progress being made this week. The balance of probabilities is still likely skewed to this week’s trade-talks resulting in relatively little. And that’s because neither side appears willing to back-down on the big strategic issues. Not only that, but US-China relations are only becoming more complex, due to the integration of issues as varied as capital market investment, human rights issues, and the business of sport. One side or the other would probably need to back-down to get a deal done this week – an outcome which seems unlikely.

Hopes hinge on some “partial” deal

There is some slim hope, and this would likely result in a temporary boost to market sentiment if it materialised, of some “partial” trade-deal. Such a deal would probably be better referred to as a kind of détente, whereby both sides agree, tacitly, that the deep-rooted conflicted is far from over, but that in the interest of their respective economies, will agree to different trade-terms with one another. Realistically, this is what last night’s risk-on move was all about. And quite pragmatically, it’s probably the benchmark market participants will be using to judge the success or failure of trade-talks in the coming days.

Fed Minutes basically confirms status quo

Also, of significance overnight was the release of the US Federal Reserve’s minutes from its last meeting – a meeting which, of course, the Fed opted to cut interest rates. A lot has happened since the last Fed meeting, so there was an element of treating the information as slightly old news. The key issue when it comes to Fed policy remains, however, and that’s: how likely are the Fed to keep cutting rates? Overall, last night’s minutes affirmed the status quo: the US economy is strong, and recent cuts are part of managing global downside risks, but policy can be eased further, if required, to sustain the US economy’s expansion.

Inflation unlikely to be a problem for US economy

As a somewhat technical point, the Fed spent some time discussing inflation targeting, and how the Fed should approach inflation targeting. Fittingly, US CPI data is released tonight, and is forecast to reveal prices grew at a slowing rate of 0.2% last month. The consumer inflation figures will back Wednesday’s underwhelming producer inflation figures, which showed a surprises contraction in prices, adding to concerns of a weakening demand in the US economy. Measures of implied future inflation indicate that price pressures should remain very subdued in the US economy, giving the Fed ample room to cut rates further, if need be.

UK GDP to show flat growth last month

Across the other side of the Atlantic Ocean, and there will be attention directed to the UK economy tonight. UK GDP figures are released, and is estimated to show flat month-on-month growth for the British economy. Economic uncertainty remains high in the UK, as Brexit nears another cliff. And that uncertainty is seemingly keeping the Bank of England hamstrung. Bets are that the BOE will need to cut interest rates by the start of 2020 to combat a slowdown in the UK economy. However, the timing of this cut is in question, as traders struggle to price-in the almost unpredictable circumstances of Brexit.