Markets are still reacting to the news of a mini trade deal for the US and China in addition to crucial developments in the Brexit process. We consider the outlook for forex, equities and commodities.
Risk appetite had a shot in the arm at a prospective US/China deal, but that only “Phase 1” could be agreed has left markets rather circumspect this week. However, the pathway to a broader deal on trade is becoming clearer, whilst perhaps the most important factor is that the dispute has not escalated. This is not all out risk on and how markets respond as the dust settles will be key, but for now, this seems to be a corner turned at least. There has also been a dramatic shift in the Brexit soap opera. Previously a deal looked enormously unlikely, however, a meeting between Irish Taoiserch Varadkar and UK Prime Minister Johnson seems to have created some sort of traction towards a deal. There is plenty still to be worked through and caution is a little more prominent as a crucial week begins. However, markets have moved significantly on elevated potential. Whether this move can really kick on will depend on progressing the deal through the EU Council meeting (17th/18th October). The UK Parliament also needs to ratify the prospective deal (presumably on 19th October). This a massive stumbling block. What has PM Johnson given to Varadkar to sweeten for a deal? Will the DUP and euro-sceptic Conservative MPs support this shift? The timetable remains tight before the 31st October deadline, but a new climate of political optimism could be crucial. EU chief Brexit negotiator Michel Barnier said on Friday, “where there’s a will there’s a way”. Tunnel negotiations (i.e. in secret to hammer out details) are underway but caution is still required with so many stumbling blocks still present.