* No-deal Brexit chances grow slim
By Han Tan, Market Analyst at FXTM
Risk appetite was given a rare opportunity to break through the gloomy clouds that hung over markets of late. Market sentiment has been boosted by news that the US and China have 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 departure from the EU 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% versus the Greenback early Thursday.
Safe haven assets are also moderating, with Gold shedding some 0.3%, the Japanese Yen weaker by about 0.3% before paring losses against the US Dollar, and 10-year US Treasury Yields spiking above the psychologically-important 1.50% level.
Westminster undermines Johnson’s “do-or-die”
The Pound is holding above 1.22 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, considering that the Pound is still lower by 1.6% since Boris Johnson became Prime Minister in July.
The Brexit path 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.
Investors still cautious over US-China trade
Despite the gains in riskier assets, 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 need to be shown material signs that the 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 their recent gains.
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