|05 September, 2019

Risk-on mode spikes as US-China set for October talks, no-deal Brexit chances grow slim

Tan Chung Han (Han Tan) joined FXTM in January 2019 as a market analyst, providing insights on global financial markets, with a focus on Asia-Pacific and Southeast Asia. A highly experienced financial journalist and news presenter, he has worked for a number of national and international business broadcasters, including Bloomberg TV Malaysia, BFM and TV3. He also reported for the popular shows Dashboard and Moving Malaysia on Bloomberg TV Malaysia. He graduated from Liberty University in Virginia, USA, in 2006.

Website: https://www.forextime.com/uk/market-analysis

Prolonged uncertainties surrounding Brexit would only ensure that Sterling remains susceptible to the UK's political risk

  • Markets offered rare chance to break through gloomy sentiment
  • Pound posts gains against most G10, Asian currencies; GBPUSD still 1.6 percent lower since Johnson became PM
  • Global investors keeping optimism in check, until path towards US-China trade deal, Brexit deal becomes clearer

Risk appetite has been given a rare opportunity to break through the gloomy clouds that have hung over markets of late. Market sentiment has been boosted by news that the US and China have officially agreed to resume trade talks in October, while UK Prime Minister Boris Johnson’s willingness towards a no-deal Brexit has been significantly curtailed, after Parliament moved to block a no-deal Brexit occurring on October 31 and also rejected the call for a snap election.

Such developments have given riskier assets cause to lift their heads higher: Asian stocks are a sea of green, while most Asian currencies are strengthening against the US Dollar. The South Korean Won is the runaway leader of the pack, gaining about 0.8 percent versus the Greenback at time of writing.

Safe haven assets are also moderating, with Gold shedding some 0.3 percent, the Japanese Yen weaker by about 0.3 percent before paring losses against the US Dollar, and 10-year US Treasury Yields spiking above the psychologically-important 1.50 percent level.

Westminster undermines PM Johnson’s “do-or-die” Brexit stance

The Pound is holding above the 1.22 level against the US Dollar, with Sterling notching gains versus most Asian and G10 currencies. Markets however are not full convinced that a no-deal Brexit can be completely ruled out at this point in time, considering that the Pound is still lower by 1.6 percent since Boris Johnson became Prime Minister in July.

The Brexit path ahead could still invoke an election, which could raise the prospects of a no-deal Brexit again in the event that PM Johnson wins a clear majority. Even the more market-friendly option of delaying Brexit would only serve to kick the can down the road, leaving the Brexit conundrum intact while keeping the Pound subdued. Prolonged uncertainties surrounding Brexit would only ensure that Sterling remains susceptible to the UK’s political risk.

Seasoned global investors still cautious over US-China trade tensions

Despite the gains in riskier assets, global investors are not getting carried away by this surge in optimism on news that the US and China are set to hold trade talks next month. After all, investors have been seasoned by the tumultuous developments thus far in the year-long US-China trade conflict.

The lift in risk sentiment appears mitigated by the concern that the latest positive developments surrounding the US-China trade impasse may prove fleeting and do not yet fully nullify the downside risks to the global economy.

In order for risk sentiment to push significantly higher, markets will need to be shown material signs that US and China are indeed drawing closer to a meaningful and lasting trade deal. Existing tariffs need to be dismantled in order to alleviate pressures on the global economy. Until then, potential gains for risk assets are expected to remain capped while safe haven assets are likely to hang on to most of its recent gains.

* Any opinions expressed in this article are the author’s own

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