The temporary trade truce between the US and China and some progress on Brexit negotiations supported risk appetite in the past week, but large gaps remain
The US and China reached a “phase one” agreement on October 11th for a limited trade deal, which should help to calm markets. Officials from both sides are due to finalize the text of the agreement in the next 5 weeks.
According to a White House briefing, China agreed, inter alia, to: i) an increase in purchases of US agricultural goods to $40 - $50 bn per annum from a previous peak of $16bn; ii) foreign exchange market transparency; and iii) an acceleration in the opening up of its financial sector. Regarding the latter, recall that China will gradually abolish in 2020 the current foreign ownership restrictions for futures firms, mutual fund managers and securities companies.
From the US’s part, the scheduled tariff hike from 25% to 30% on c. $250 bn worth of imports from China due to be implemented on October 15th, was suspended. Regarding the implementation of increased tariffs of 15% on c. $160 bn worth of imports from China, planned for December 15th, the US refrained from making a decision at this point.
Brexit negotiations accelerated following a meeting on October 10th between the UK and Irish Prime Ministers, who saw a “pathway to a possible Brexit deal”, albeit no details were provided. Subsequently, the EU and UK entered “intensive discussions” on Friday October 11th . However, media reports suggest that reaching an agreement on the highly contentious Irish border issue remains very challenging, especially before the European Council Summit in October 17th/18th. Recall that the Summit is a crucial date for an agreement to be reached so that it can be put to vote in the UK Parliament on October 19th. If the UK PM fails to secure an agreement that gains Parliamentary approval, the Benn Act requires him to request a 3 month extension to Article 50 until January 31st.
Global markets welcomed the developments on the two major sources of policy uncertainty (“trade wars”, Brexit). Overall, the MSCI ACWI was up by 1.2% wow. In the US, the S&P500 increased by 1.1% on Friday (+0.6% wow), although it closed c. 0.8% below the intra-session highs. The EuroStoxx rose by 3.1% in the past week and the FTSE100 by 1.3%.
At the same time, reduced safe haven demand by investors led government bond yields to rise significantly, with the US Treasury 10-year yield up by 20 bps wow to 1.73%, the 10-year Bund yield by 14 bps wow to -0.44% and the UK 10-year Gilt yield by 26 bps wow to 0.71% (followed by a decline of 6 bps to 0.65% on Monday). Finally, progress on Brexit negotiations supported the British Pound, which was up by 2.5% wow (in nominal effective exchange terms).
Equity indices recorded modest losses on Monday (October 14th), in the range of 0.3% - 0.5%, due to: i) the lack of details in the US – China agreement, combined with the fact that the relatively more contentious issues (e.g. forced technology transfers, intellectual property practices, State subsidies to Chinese firms) will not be negotiated until later, (likely November); and ii) signs that large gaps remain in Brexit negotiations.