Huge week for Brexit

In Europe talks between the UK and EU have hit a lull following positive developments as Irish PM indicated a deal could be made. Last week, Leo Varadkar and Boris Johnson engaged in last-ditch negotiations have raised expectations of a possible Brexit deal. The details of the deal are vague but rumors indicated that Johnson has made compromised on the issues of customs in Norther Ireland but would have the veto right over any changes. The simplest deal form, Northern Ireland would stay in the EU customs union. This represents a substantial shift by the Irish government that has so far been relatively negative about the outlook of discussion continuing. With the “clock on the field”, Brexit talks have taken a manic feel increasing the likelihood of a tail-like event. Cable surge to 1.2703 (200d MA) has marginally corrected as talks have stalled over the weekend. With talks in Brussels and Queens Speech, news flow will be “coming in hot”. The Queen’s speech will outline the government’s plans for legislation including details for the withdrawal agreement bill will be voted; on should, the EU agree to a Brexit deal this week. By Thursday, the market should have a better view of what will happen but currently, viability is very low. Market continues to price in the least disruptive outcome. We don’t believe the outcome is already on the field, therefore we would keep GBP trading light

It’s tariffs time !

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Asian stock markets are celebrating the latest headlines that the first phase of a potential trade deal agreement is planned to be signed by mid-November 2019. Yet the trend does not support EU equities as the US is expected to announce tariffs of $7.5 billion on EU goods by mid-October following WTO ruling on Airbus subsidies while rumors of potential tariffs on Swiss pharma are emerging.

Asian investors have turned to US-China trade negotiations that would force China to purchase up to $40 – $50 billion of US agricultural products per year, in exchange for a deferral of US tariffs on $250 billion of Chinese goods. Yet trade progresses remain limited since the coming phases focusing on structural issues such as forced technology transfer, intellectual property protection and government subsidies are likely to mute current optimistic views as December tariffs on $156 billion of Chinese goods are still on the pipeline. Despite short-sight optimism, the release of September exports and imports at -3.20% (prior: -1%) and -8.50% (prior: -5.60%), drops to respectively 7-month and 4-month low amid sluggish domestic demand should force Chinese authorities to strengthen monetary policy easing measures in order to maintain current growth target within the lower end of current 6% – 6.50% target band. On the same line, EU lawmakers are willing to take countermeasures against US duties on aerospace, whiskey and cheese due in the coming days as further tariffs on EU cars could well come into force in November, paving the way towards escalating trade tensions. In addition, the Swiss pharmaceutical industry could face similar sanctions with an introduction of tariffs on Swiss drugs exports in the US, the second largest market after the EU. The latter would not only harm the competitiveness and margins of the Swiss pharmaceutical industry (e.g. generics and biosimilars), but would also have a considerable impact on the country, as the industry represents about one-fifth of GDP contribution.

USD/CNY is currently trading at 7.0743, slightly above current fixing at 7.0725


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