Submitted by Michael Every of Rabobank

Deals Flying Around

The final quarter of 2019 is shaping up as a quarter of deals. A “phase-1” trade deal between the US and China is in the making, the US just agreed with Turkey on a ceasefire in Syria, and UK Prime Minister Boris Johnson struck a last-minute deal with the EU yesterday. And the world’s just become a better place, right? Well, not so fast! Remember that the US-China trade deal is just “progress” in the eyes of China and it remains to be seen whether this leads to a signing ceremony at the APEC meeting in Chile next month, especially as the Trump administration doesn’t seem willing to roll back current tariffs, a key demand by China. Meanwhile, the US tariffs on USD7.5bn of European goods have just kicked in, and Cheese, wine, olives and many other European goods will be subject to a price hike; the French Economy Minister Bruno Le Maire said on the sidelines of the IMF annual meetings that “Europe is ready to retaliate, in the framework of course of the WTO."

"We, Europeans, will take similar sanctions in a few months, maybe even harsher ones — within the framework of the WTO — to retaliate to these US sanctions," Le Maire said in a radio interview earlier this week.

So back to the deals and the markets then. The ceasefire in Turkey appears to be just a pause in hostilities and has met with as much criticism as it has received hails. With the situation in that region of the world becoming more complicated by the day, it’s no surprise that financial markets are having a hard time in assessing whether this is good or bad, or really just doesn’t matter at all. Oil prices did move higher yesterday around the close of European business (nearest future for Brent +$1/bbl), whilst the Turkish lira rose sharply as the agreement between the US and Turkey took to the airwaves. TRY gained almost 2.5% against the dollar.

Meanwhile, European markets had to assess what is going on with “Brexit”. Both the Labour opposition, the SNP as well as the DUP were remarkably quick to describe the deal, announced by European Commission President Jean-Claude Juncker and Prime Minister Johnson, as “worse” than the previous deal struck between the EU and Theresa May. With reports showing that Johnson will lack the required votes to sail this deal through parliament on Saturday we are still up for a 48-hour roller coaster. Logic reasoning suggests Saturday’s vote will fail, but sentiment and Brexit fatigue may still play into the hands of Johnson, swaying sufficient MP’s to his side. In that sense, anything seems possible at this stage and that’s probably why the market’s reaction has been volatile but lethargic at the same time. Sterling did manage to maintain its upward momentum vis-à-vis the dollar but was largely unchanged against the euro, which itself gained 0.4% against the dollar yesterday as the Brexit deal progress was seen as being equally positive for Europe.

At the same time, the dollar was weighed down by economic news. US industrial production fell by a more-than-expected 0.4% in September partly undoing the (relatively sharp) gain in August. Whilst a GM strike during that month was singled out as contributing to the weakness, the trend obviously fits with a pattern of manufacturing weakness still spreading across the globe and onto other sectors of the economy. Singapore electronic exports (released yesterday before the European trading session) were down 24.8% y/y, implying virtually no improvement from August. Falls in US housing starts and building permits for September and a decline in the Philadelphia Fed Business Outlook for October completed the downbeat picture.

The data out of China this morning make for a rather mixed picture, albeit perhaps not as weak as feared. Industrial output growth actually picked up some steam in September (accelerating from 4.4% y/y to 5.8% y/y) and so did retail sales (accelerating from 7.5% to 7.8% y/y). Still, overall GDP growth slowed from 6.2% y/y to 6%, hitting the lowest growth rate in almost 30 years. Fixed investment growth also slowed with its contribution to GDP slowing from 25.9% to 19.8%. Moreover, in nominal terms the slowdown in GDP was more significant, as the GDP deflator plunged from 2.1% to 1.6% y/y signalling easing price pressures. So the upshot of these numbers is that whilst the slowdown appears to be losing some of its sting, broader weakness continues to spread. And even if this let-up in activity is a sign that PBoC’s targeted liquidity measures and governments tax cuts and stimulus may finally be gaining some traction, the global slowdown may not be over just yet. Indeed, as growth slows in the US and Europe, we believe it is too early to call this a reversal of economic fortunes.