Risk sentiment improves after US-China phone call, Johnson loses again

Summary:

• Equities rebound all around the world following a phone call held between US and Chinese officials on Wednesday
• Gold and silver move down, the Aussie leads the gains in G10, the US 10Y bond yield jumps back above 1.5%
• A bill aiming at blocking a no-deal Brexit has been approved by the House of Commons, a Johnson’s election idea has been dismissed by a large margin

In the spotlight again

Risk sentiment has clearly improved in recent hours following the news that US and Chinese officials (Vice Premier Liu He, US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer) had a phone call yesterday when they agreed to hold a face-to-face meeting in Washington in the coming weeks (possibly at the beginning of October). The information has been confirmed by the US Treasury Department, however, it has yet to offer a specific date when negotiations in the US capital might take place. Moreover, the Chinese Commerce Ministry added that so-called lower-level officials would have “serious” discussions this month to prepare for the talks next month. Even as this not suggests any progress to be made in the foreseeable future, market participants have probably taken it for granted looking at what has happened across financial markets. On the other hand, investors may hope that US President Donald Trump will reconsider his idea to ratchet up tariffs on China on October 1 and maybe then in December 15. As a consequence, we have seen a solid bounce in global equities, a decline in precious metals and US bonds as well as a lower demand for safe haven currencies. Nonetheless, let us notice that this rebound might prove to be temporary and is likely to be highly dependent on incoming revelations from the trade front as it was the case in the past. Finally, the chart below shows why the latest duties slapped by the US on China are so harmful to US consumers (they affect consumer goods the most).

US consumers have been hit hard by the latest tariff round. This could be a counterproductive strategy for the US economy as a whole. Source: Bloomberg

Johnson gets another blow

On Wednesday, the House of Commons approved a bill aiming to block a hard Brexit and the bill has gone to the House of Lords for approval. Information obtained by the Associated Press suggest the process should be completed on Friday. Keep in mind that London is running out of time given the fact that the British parliament kicks off another recess on Monday. If the House of Lords approves the bill without adding any amendments, then the UK will be equipped with a legal right to ask Brussels to postpone the Brexit deadline by three months (until January 31). Along with a vote on the above-mentioned bill, a vote on general elections, proposed by Boris Johnson, also took place. However, British Prime Minister saw another crashing defeat getting only 298 votes compared to at least 434 votes needed. Now it seems that a lot will depend on when the House of Lords expresses its opinion. If it is tomorrow and it approves the bill, then everything should be fine for the parliament. Nevertheless, if the upper house gives its opinion later or if it adds some amendments, the House of Commons could be nervous and the Johnson’s idea to hold snap elections may get back on the table. 

The GBPUSD keeps trading close to its yesterday’s highs in early trading on Thursday. Source: xStation5

In the other news:

• Foreign trade data from Australia for July showed a 7.3 billion AUD surplus, the consensus had called for a 7 billion AUD surplus

• The Swiss economy expanded 0.3% QoQ during the three months through June, slightly higher than expected 0.2% QoQ increase

• German factory orders for July fell 2.7% MoM, worse than an expected 1.4% MoM decline