HomeContributorsFundamental AnalysisWhatever The Trigger, Brexit Trade Talks Are Back On

Whatever The Trigger, Brexit Trade Talks Are Back On

Markets

Sterling made an impressive comeback yesterday. EUR/GBP declined from 0.9131 to 0.9022, falling just shy of testing the October low (EUR/GBP 0.9007). GBP/USD rallied from 1.2948 to 1.3149, leaving behind first resistance at 1.3083. Yesterday’s dollar weakness added to cable’s surge. The UK currency profited from the outcome of call between EU chief brexit negotiator Barnier and his UK counterpart Frost. They agreed to start so called “tunnel” talks, ie intensively meeting on a daily basis until the finish line. Downing Street published an official 10-point principle plan for organizing further negotiations. The breakthrough came as the UK interpreted the EU stance as being softened compared to last week’s EU Summit. In all honesty, it’s merely semantics as Barnier’s statement barely reflected changes vis-Ă -vis his previous one. We interpret it as more of a positioning move by the UK who claims to have forced the EU to make concessions, referring for example to Barnier’s quote “not to undermine UK Sovereignty”. Whatever the trigger, brexit trade talks are back on. Next support in case of additional progress stands at EUR/GBP at 0.8966 (76% retracement from September spike) and next at EUR/GBP 0.8864 (June & September low).

A solid 20y US bond auction capped the recent rise in US yields. The US yield curve still bear steepened in a daily perspective with yields adding 0.5 bps (2-yr) to 4.5 bps (30-yr) and both the US 10y yield and 30y yield closing above resistance levels (respectively 0.8% & 1.61%). Core bonds regain some ground overnight as risk sentiment sours following comments by US Director of National Intelligence Ratcliffe who confirmed that some voter registration information has been obtained by Iran, and separately Russia. The report on potential election meddling adds to uncertainty about accepting the election outcome. This US institutional risk pulls US equity futures lower, benefits US Treasuries while the dollar retraces early overnight gains. The trade-weighted dollar remains in the lower half of its sideways range after ceding 93 while EUR/USD remains above similar 1.1831 resistance. Yesterday’s significant setback in USD/JPY doesn’t persist this morning despite the fragile risk environment. At this stage, we don’t think that the election interference theme will take over from anticipation of large Democrat fiscal stimulus after the election. Today’s eco calendar contains EMU consumer confidence and US weekly jobless claims. Last week’s unpleasant rise triggered a market reaction. A >900k reading probably won’t go unnoticed. We hold on to our dollar negative bias while a risk-off environment and weaker US eco data could temporary halt the rise in US yields. However, technical breaks and the fiscal stimulus / reflation idea could push them higher still longer term.

News Headlines

Caixin reports that China is preparing to raise quota for funds to invest in foreign securities. Quota for Qualified Domestic Institutional Investors are said to be increased by $ 10 bln. The QDII quota stood at $ 107 bln in September. The move might be inspired by recent rise of the yuan and might counterbalance capital inflows into China, e.g. due to foreign buying of Chinese bonds. The yuan on Wednesday reached the strongest level against the dollar since July 2018.

According to a Survey of Consultancy firm McKinsey, over half of small and medium-sized companies in Europe fear for their survival in the next 12 months. The survey was conducted at 2200 companies in five European countries (France, Germany, Italy, Spain and Britain). 55% of those firms reported they might shut down by September next year if revenues stay at current levels. The Survey was conducted in August, before the recent rise in corona virus cases that is causing governments to take additional measures that might further hurt economic activity.

 

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