After what started as a broader risk-off tone last week, Friday saw some more positive news on the Sino-US mini-trade deal and Brexit developments; although excitement surrounding the latter quickly fizzled out, we look to the Queen’s speech later today. Geopolitics also grabbed market attention as Turkey ramped up its offensives in Syria; one to watch this week. Having fallen to as low as 1.50% last week, the yield on the 10-year US Treasury closed 20bps higher at 1.73%. The dollar (DXY Index) fell 0.51% last week while the offshore Chinese renminbi was up 0.44% against the greenback. Oil (Brent) rallied ~4% following upbeat trade sentiment.
Last week ended on the news that a “Phase 1” deal had been reached between the US and China and the tariff increase, set for Tuesday 15th, has been delayed. The main areas covered in this initial phase include: US agriculture purchases (China to buy $40-50bn annually, from $8bn currently and way above the $20bn US expectations), the opening of China’s financial markets and a currency agreement. The more contentious issues surrounding intellectual property and the technology sector are due to be discussed during the next phase of talks. Although the news appears positive, markets appear to be treading carefully as historically trade progress has whipsawed and there is still a long way to go before the next threat of tariff hikes, on Dec 15.
Following the OECD global growth forecast downgrades a couple weeks ago, we heard from the International Monetary Fund (IMF) and World Bank, and the warnings came thick and fast. The IMF’s new Chief (and former chief executive officer of the World Bank), raised her concerns over the global economy’s “synchronised slowdown” citing trade tensions as the main culprit of “substantially weakened” manufacturing and investment activity globally, thus global growth is at “a near standstill”. Her former colleague, David Malpass, the World Bank president noted that he expects global growth “to be even weaker” than the organisation’s previous growth estimate in June, highlighting “Brexit, Europe’s recession and trade uncertainty” as the main drivers. We look to this week’s IMF and World Bank annual meetings where we expect the global economic outlook to be downgraded further from June estimates.
FOMC minutes showed the Fed members are once again split; the minutes didn’t give any more clues as to further tightening. Of note last week were the Fed’s Chair Powell’s remarks that the central bank will resume its purchases of short-term US Treasuries in an attempt to expand the balance sheet and avoid recent repo market disruptions. He made it very clear that this does not constitute QE, rather it is for “management purposes”. Powell also appeared to reaffirm market expectations of a further rate cut by the end of the year; the futures market closed the week pricing in a 71% chance of a rate cut at the meeting later this month. The lack of inflationary pressures, CPI was broadly flat in September, will allow the Fed flexibility to cut rates. At this stage in the tightening cycle, we remain comfortable with our high-grade positions.
This morning's trade data releases out of China unsurprisingly disappointed in September. Other key data this week includes: Euro-area industrial production later today, China inflation, US Empire manufacturing and UK employment releases on Tuesday. Focus will shift to US retail sales, on Wednesday, especially following broadly weaker than expected US headline figures. The Fed’s Beige book is also due on Wednesday along with the UK and Euro-area inflation prints. US housing starts, industrial production and UK retail sales may garner some attention on Thursday. On Friday China will release its Q3’19 GDP reading along with industrial production and retail sales prints.