- Markets hope for progress at today’s high-level US/Chinese trade talks
- PM Johnson throws demand for new election into the Brexit mix
- ECB President Draghi bows out with a downbeat economic assessment
- U.S. consumer sentiment expected to hold its early-Oct gain
Markets hope for progress at today’s high-level US/Chinese trade talks — The markets are hoping for some progress at a telephone conference call scheduled today among USTR Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu. Time is growing short for a deal since the two sides are hoping to have a final written agreement for Presidents Trump and Xi to sign at the upcoming APEC Summit in Chile on Nov 16-17.
There was some positive news yesterday with Bloomberg reporting that China is willing to commit to $20 billion of purchases of U.S. ag products annually as part of a phase one trade deal, and would be willing to boost that figure towards $40-50 billion in later phases of a trade deal. A Chinese commitment of $20 billion in ag purchases would take those purchases only to where they were in 2017 before President Trump launched his trade war and China responded with retaliatory tariffs on virtually all U.S. products with a particular emphasis on ag products.
There was no word on whether China is demanding that President Trump scrap his plan for a 15% tariff on December 15 on the remaining $160 billion of Chinese goods as a precondition for a phase one deal. If China doesn’t get that concession, then all China is getting in return for its phase one trade commitments is Mr. Trump’s recent move to scrap the hike in the tariff to 30% from 25% on $250 billion worth of Chinese goods that would have taken effect on Oct 15.
PM Johnson throws demand for new election into the Brexit mix — The good news is there won’t be a no-deal Brexit late next week on Oct 31. The bad news is that everything else about Brexit is highly uncertain.
The UK is waiting for the EU’s decision today on the new Brexit deadline, which will almost certainly be January 31.
Meanwhile, Prime Minister Johnson yesterday called for a general election on December 12. Mr. Johnson apparently is not particularly confident about winning final approval of his Brexit deal with the current Parliament. Mr. Johnson is therefore willing to throw the dice on a new election in an attempt to win a Conservative majority and make Brexit passage easier. While the Conservative Party is ahead in the polls, there is no guarantee that Mr. Johnson would win a majority since a significant number of seats could be siphoned off by Nigel Farage’s Brexit Party.
There is also no guarantee that Mr. Johnson will get his election on December 12. In order to get that election, Parliament, in an expected vote on Monday, would have to vote in favor of any election by a margin of at least two-thirds. Mr. Johnson won’t have enough votes unless Labour leader Corbyn agrees and instructs Labour members to vote in favor of a new election.
Mr. Corbyn yesterday reiterated his position that he will only agree to new elections if the threat of a no-deal Brexit has been removed. He said on Thursday he would withhold a decision on a new election until he sees what the EU decides today on a Brexit extension.
A December 12 election would cause a large amount of new Brexit uncertainty for the markets and would therefore be bearish for sterling. Parliament would have until only November 9 to pass the current Brexit deal before legislative business would be halted ahead of the election. Assuming Brexit couldn’t pass before November 9, then a Brexit deal would depend on which party wins the election. If the Labour Party were to unexpectedly win, then the whole Brexit process could be substantially delayed beyond January 31 because the Labour Party would want to negotiate a new withdrawal agreement with the EU and might also require a public referendum to approve any final Brexit deal.
If Labour rejects a December 12 election, then Mr. Johnson will be forced to try to ram his Brexit deal through the current Parliament before what is likely to be the new Brexit deadline of January 31. That would give Mr. Johnson’s opponents plenty of time to throw up roadblocks and amendments, which means that Mr. Johnson would have a tough road ahead in getting his Brexit deal approved before January 31. Sterling on Thursday fell farther from Monday’s 5-month high and closed the day down -0.47% on the increased uncertainty sparked by Mr. Johnson’s call for an election.
ECB President Draghi bows out with a downbeat economic assessment — ECB President Draghi at his last ECB meeting yesterday bowed out with a downbeat assessment of the Eurozone economy by saying that the incoming data confirm “protracted weakness of the Eurozone economy, the persistence of prominent downside risks and muted inflationary pressures.” Former IMF chief Christine Lagarde will take over at the helm of the ECB next Friday (Nov 1).
Mr. Draghi on Thursday tried to allay market fears that the ECB doesn’t have much room for its new QE program of 20 billion euros/month that begins on November 1. He said that it is going to “take quite a bit of time” before the current limit “will realistically present itself.” He also noted that the ECB’s QE rules are self-imposed, implying that the ECB could easily change those rules to expand the pool of securities that it can buy.
U.S. consumer sentiment expected to hold its early-Oct gain — The consensus is that today’s final-Oct University of Michigan U.S. consumer sentiment index will be unrevised from the preliminary report of 96.0, which would leave the index up by +2.8 points from Sep. The early-Oct report was an upside surprise relative to market expectations based on the harsh political climate and worries about the trade war.
