Morning Brief – Tuesday 4th

P.S. there’s a trade deal.

The U.S President, on official state visit to the United Kingdom, had a turbulent landing at Stansted airport yesterday. I’m sure air conditions were smooth over the north easterly runway, however, the President’s Twitter account had already brewed up a storm ahead of touch down. Fake news, vitriolic assessment of the London mayor Khan, and the Trade War were all commented upon at 600 knots.

Seven hours later and it appeared that the Trumps were impressed by their royal welcome and whilst thanking her majesty and her entourage for their warm welcome Donald even mentioned in postscript that “also, big Trade Deal is possible once U.K gets rid of the shackles. Already starting to talk!”. At the Royal banquet yesterday evening, warm words were exchanged between her majesty the Queen and the President. So, with the so-called special relationship showing its mating ritual in a bout of political intercourse why did Sterling fail to firm up? 

Perhaps the Trump administration’s proven track record of whiplash inducing direction changes on trade and foreign policy left New York and Asian session traders unwilling to take the gesture on the trade front seriously enough to adjust their Sterling valuations. Further messages on trade might prove more impactful at the market level in today’s European session as the outgoing PM co-chairs a meeting with leaders of industry and the US premier. 

Maybe commitments on post-Brexit trade are foreseeable. Latest readings from official and commercial bodies alike show the trade war is starting to cause cracks in the global economy. Ten-year Bond yields in the US now carry only approximately two thirds of their reward earned only five months ago. Today’s fixed income valuations across the globe demonstrate investors’ fright and appetite for safety even at negative rates of return. If much needed resolution for the US and the globe is not to be found with China, Mexico, or any other nation in the sights of the Tariff man then perhaps some could be found with us? 

Don’t get your hopes up. The shackles of trade, as the President tweeted striking an alarming resemblance to his buddy Nigel, surely can’t be on if the deal is to materialise. And how far away might that be? Moreover, for you Sterling sellers, there’s £136Bn hole to be made up in Sterling rallying U.S imports versus present EU exports – an impossible ask for a trade deal to precipitate!

Last quick note on Euro price action this week. Thursday will see the European Central Bank offer its latest monetary policy decision. This decision will include rate setting on TLTRO3, a potentially market moving event. Meanwhile markets are pricing in a hyper dovish 50% probability of a rate cut this year. Someone’s got to shift and there are two ways to do it for Draghi: convince markets they’re wrong and you’re still on track for your 2020 rate hike OR out-dove the market itself. With the former you risk the market disbelieving you and unhealthy and uncertain bond market price action unfolding for the next few months. The latter would involve potentially threatening to dust QE off and roll it out again or worse still cut rates and could create short run and turmoil through the curve.

Because market expectations of the event are so firmly skewed to the downside, I anticipate a favourable Euro appreciation around the decision provided expectations remain stable between now and the release. Yesterday’s Euro bid appears confirmatory of market positioning for the ECB’s decision. Negative 20 basis point yields on bunds would take some serious beating and an out-dove might be a move that Draghi chooses to shirk. 

Discussion and Analysis by Charles Porter

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