Risk appetite Lite with sterling in focus

Summary

A semblance of risk appetite is returning.

Car tariffs take a round trip

Wall Street led the beginning of the rethink, closing off lows. Chinese stocks and Europe follow. U.S indices could stay on track, according to the bid in December futures. A call between U.S. Treasury Secretary Mnuchin and China’s Vice Premier Liu, reported in Europe’s early hours, was one hook. It was apparently intended to show that lines of communications remain open. A theme of peripheral concessions to get a trade deal sealed is emerging. Still, we doubt that optimism is as abundant as before value was torched over the last 2 months or so. Scepticism is also likely to temper initial reaction to talk that Chinese car tariffs could be reduced. Note these duties have taken a round trip this year up from 15%, then 40% latterly, and now, if reports are correct, are merely headed back to their initial base. Consequently, a recent tendency among investors to take quick profits as the speculative class sells unconvincing rallies is quite likely to remain evident this week.

Brexit upgraded again

Our perception is that after Tuesday's theatre of the absurd in Westminster, Brexit has moved higher up among broader priorities too. This has not always been the case this year. But with the pound against the dollar and euro forced out of three-week ranges and back into heightened volatility, higher risks and—for the small speculative cohort—more opportunities, mean sterling is no longer near the back burner. This underscores caution overall. Note the pound’s supine reaction to the strongest pay growth in a decade. True, cable had already snapped 130 pips up from Monday afternoon’s collapse. But that move was a clear retracement of Monday’s fall, suggesting short covering. An underlying static reaction to strong data shows caution remains.

Brexit vol.

With Prime Minister Theresa May on her way to Brussels after calls with senior EU leaders, a lilt of supportive sentiment is abroad. But for sterling and for the wider asset picture, Brexit remains a mostly unappetising moveable feast. The bloc has telegraphed its position clearly. Weak probabilities consequently mean poor risk/reward. Don’t expect sterling to break decisively higher under these conditions. Note, implied volatility dips for one-month options whilst rising in nearer-term trades; as in one-to-two-weeks. At the same time, it’s reaching fresh 18-month peaks in 2- to 3-month contracts. This shows provision is being made for a febrile rest of December but that the most punishing whipsaws are expected as Britain approaches exit.

Sterling spring back looks done

From a technical chart perspective, it would be remarkable if the pound against the dollar retook a prior region of long-term defence around $1.266, without miraculous good news. It was the 14^th August launch point for cable’s last major foray. Furthermore, price has toyed with that line numerous times since 2016’s referendum. We’d expect a return back to $1.2513 support established in April last year before a peek above $1.266. In other words, sterling’s elastic bounce from mayhem has probably hit limits.