Equities lower amid key week for trade talks and Brexit

Morning Note

Looking like a fairly quiet start to the week with markets yawning open a tad lower, but we could be in for some fireworks with Brexit and US-China trade talks front and centre.

Brexit will dominate the agenda this week as the UK government tries to get the EU to look at its homework. So far Brussels is not prepared to even look at the proposals, let alone grade it. Boris Johnson has his work cut out if he’s to pass this test. Still seems odds-on to take Britain out of the EU on Oct 31st whatever deal is on the table, however there’s a lot of rumours and noise about what Parliament will do to prevent a no-deal exit at any cost. MPs seem prepared to completely crash the constitution to block Boris. 

Meanwhile trade talks between the US and China will be the major focus as Liu He, the Chinese vice premier, heads to Washington. If these talks fail to produce anything then tariffs on $250bn worth of Chinese goods will be hiked from 25% to 30%. Hopes of a comprehensive trade deal being agreed this week are slim. Reports indicate that China is ‘reluctant’ to do a broad trade deal.  

After a volatile week due to some rocky macro data from the US, equity markets finished on a stronger note. Wall Street closed sharply higher on Friday, with the S&P 500 up 1.42% for the day after not-too-hot, not-too-cold payrolls number. SPX is now only about 70 points off its all-time high – we’re in a place where the market is set up for disappointment should the trade talks break down.   

European stock markets will be eyeing the trade talks and Brexit and may show little direction at the start of the week. The FTSE 100 came off its lows over the last two sessions but has stalled around 7150, around the 23% retracement of the plunge at the end of July through to mid-August. US futures point to a softer start to the week, reflecting some pessimism around trade. European markets were broadly lower in early trading on Monday.

German factory orders this morning show yet more weakness in Europe’s biggest economy. Factory orders were –0.6% month on month versus an expected –0.3%, and down 6.7% year-over-year. The collapse in German manufacturing has been spectacular.

GBPUSD has been a little shaky but volatility is not especially high as the market waits to see what happens on Brexit. Anything within 1.22-1.24 is in the range. A break on either side of this could be chased. EURUSD is marching slowly higher but running into resistance around 1.10 – twice attempted last week and twice failed. A third go will need to succeed or we may expect a retrace to the bottom of the range 1.0880. 

Bitcoin is weaker, testing the lows of late September again. Futures opened the week down around the $7770 level. Gold is holding the $1500 level as US yields declined heavily last week. If trade talks break down we may see a retest of $1525 and $1550.  

Watch for LSE Group as HKEX has until Wednesday to come up with a better offer. Talk of love-bombing and charm offensives to try sway investors. Even if it were to deliver a knockout premium, one thinks that there are just too many execution and deliverability risks around such a tie-up to make it work. The British government would also have the casting vote. What is not clear is whether a big US exchange tries to swoop in.

A slowdown in construction activity across Europe and the UK continues to hit SIG. The company today has issued a statement warning of significantly lower underlying profitability for the full year than its previous expectations, due to a weak construction market, particularly in Germany and the UK . Things look pretty bad as it’s having to flog a couple of its businesses to steady the ship. To shore up its finances the company is selling its Air Handling division for c£200m, with around £130m to be used to reduce debt. It will also offload its Building Solutions to Kingspan Group for £37.5m. 

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