For those who are hoping next week
The meeting where Trump and Xi speak
Will end with a truce
That might be obtuse
As progress this weekend was bleak

The holiday week opens with a mixed picture in the currency markets and limited movement in both equity and bond markets. This past weekend saw an APEC meeting end with no communiqué, adding to the recent trend of a lack of ability for current trading partners to find common ground amongst themselves. In this case, it seems that the Chinese were unwilling to accept a particular sentence in the final draft as follows: “We agreed to fight protectionism including all unfair trade practices.” It is not clear if the problem was the term protectionism, or the reference to unfair trade, but the twenty members aside from China, including the US, were all comfortable with the phrase. What is clear, however, is that there has been very little movement toward consensus on how trade issues should be handled and what actually constitutes free and fair trade.

The immediate impact was that APAC currencies, including AUD and NZD, were broadly weaker on the day, with Kiwi actually falling the furthest, -0.8%. It seems that all the nations in the region are going to continue to have to tiptoe around the trade situation between the US and China, which given that every one of them has built their economy based on trade with China and security from the US military, has become a very difficult balancing act. Until the US-China trade issues are resolved, it seems likely that these currencies will underperform their peers.

The other impact from this situation is that it now seems increasingly unlikely that the meeting between Presidents Trump and Xi, scheduled for next week at the G20 conference in Buenos Aires, will be able to find enough common ground between the two to prevent a further escalation in the trade war. If you recall, President Trump has indicated that tariffs on Chinese exports would be increased to 25% in January from the current 10% level, and that the administration would open comments on attaching tariffs to the other $257 billion of Chinese imports not already affected. Both businesses and market participants have been counting on the fact that Trump and Xi would halt this negative spiral, but after this weekend, it seems somewhat less likely that will be the result. Of course, anything is possible, especially in the case of political negotiations, so all is not lost yet.

Otherwise, things have been pretty dull. In the UK, both Brexiteers and Bremainers have been trying to muster their troops for the upcoming internal battle. The Europeans have said that the deal on the table is the best that is coming and there will be no further changes. However, M. Barnier also tried to spin things by indicating that the deal, as it stands, does not mean the UK would be beholden to EU rules forever. Meanwhile, the machinations in the UK parliament are ongoing, where allegedly 42 MP’s have written letters seeking a no confidence vote in PM May, just six less than the 48 required to call such a vote. In the event a vote is called and PM May loses, it is not clear how things will play out. A new PM could be elected, or there might be an entirely new national vote. However, in either case, it would delay the UK process and that is a big problem given that there are now just over four months remaining before Brexit is official. While I had always assumed that some fudge deal would be completed, I have to say that the odds of that are perhaps no better than 50:50 now. In the end, traders who had been somewhat optimistic at the end of last week are less so this morning with the pound having fallen 0.25%. Absent a big change in sentiment, it appears that the pound has further to fall.

And really, those are the only two stories of note this morning. The Italian budget opera remains ongoing, but has not garnered any headlines lately as we are in the midst of reviews, although it seems certain that the EU will take the next step and propose sanctions. Aside from the APEC trade story, there is nothing else specific from China, and as this is a holiday week, there is limited data due. One thing that may be changing, however, is that the Fed may be softening its stance as recent data in certain segments of the economy, notably housing, has been less robust. While a rate hike next month seems certain, the trajectory for 2019 seems less clear than it did back in September. If that is the case, my dollar bullishness is likely to be tempered.

Here is the data for the abbreviated week:

While each data point represents further information for the FOMC, it is not clear that any one of these will stand out on its own. As to Fed speakers, there is only one this week, NY Fed President Williams speaks this morning, but after that it appears the FOMC is taking the Thanksgiving week off.

It seems unlikely that either today’s session, or the rest of the week will be too exciting. The one exception would be if there is a ‘no-confidence’ vote in the UK, where the outcome would have a direct impact on the pound. If PM May holds on, I would look for the pound to rally sharply as that implies that she will have sufficient support to push through the Brexit deal, however if she loses, it will be very cheap to go to London for Christmas!

Taking my cue from the Fed, I will not be writing a letter until next Monday, November 26th.

Until then, good luck and have a wonderful holiday
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