Risk appetite has taken a hit as President Trump has discussed the prospect of raising tariffs further on China if there is no agreement reached on “phase one”. This could still be part of his carrot and stick approach to negotiation, but it is spooking markets which had been positioning towards the two countries coming towards a deal. Treasury yields are falling, whilst the yen is taking renewed strength and gold is also edging higher. Watching the Dollar/Yuan rate pulling back higher again decisively higher from 7.00 again shows the concern is growing. Equity markets are also starting to feel the pinch of some profit-taking after some strong runs higher in recent days/weeks. The reaction to these moves will be very interesting now. If there is a containment to the flow into safe havens, then it would suggest that once the initial knee jerk response is factored in, there would still be an expectation that the US and China will be working to a deal. Aside from this, tonight we get the FOMC minutes. It will be interesting to see how cautious (or not) the Fed was at a meeting of a -25bps rate cut. The market seems fairly set in its assessment that the Fed is now on hold for the foreseeable future.
Wall Street closed lower with the S&P 500 -0.1% at 3120 whilst US futures are another -0.2% back today. Asian markets have been broadly corrective today with the Nikkei -0.8% and Shanghai Composite -0.7%. In Europe there is a less corrective but still cautiously negative open, with FTSE futures -0.1% and DAX futures -0.4%. In forex, there is a mild risk negative and dollar positive theme, with JPY, USD and CHF all performing well. In commodities, the mild drift higher on gold continues, whilst there is little sign of any rebound on oil after the selling pressure of the past couple of days.
It is another quiet European morning on the economic calendar, and in fact, it pretty much stretches into the US session too. Very light data with just Canadian inflation at 1330GMT which is expected to remain at +1.9% in October (+1.9% in September). The EIA oil inventories are expected to show crude stocks building by +1.1m barrels (+2.2m barrels last week), whilst distillates are expected to drawdown by -0.5m barrels (-2.4m barrels) and gasoline stocks to build by +0.7m barrels (+1.8m barrels last week). The key announcement of the day is with the FOMC minutes for the meeting on 30th October. There is a widespread expectation of the Fed now being on hold for now for some time to come, so any hawkish or more likely dovish deviation in message from the minutes could be market moving.
Chart of the Day – EUR/NZD
We have seen the euro relative performance through major cross pairs suffering in recent weeks. With the RBNZ holding back from an expected cut the Kiwi has strengthened in a move that has broken EUR/NZD below the old pivot band support at 1.730