Risk appetite Lite with sterling in focus

A semblance of risk appetite is returning.


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 14th 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.

Technical analysis chart: sterling/U.S. dollar – daily intervals (11/12/2018 12:33:11)

Source: Refinitiv/City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.