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Sino-US interim trade pact likely, ECB surprises markets

While Boris Johnson sticks to his plan to deliver Brexit by 31 October, the US and China show signs of rapprochement ahead of key trade talks.

Centtrip: Sino-US interim trade pact likely, ECB surprises markets

The US and China appear to be narrowing their differences over trade ahead of key talks next month. The positive mood has improved risk appetite overnight and reduced the demand for safe havens, with the Yen trading near a six-week low versus the Dollar in early trade.

US President Donald Trump said yesterday, 12 September he would not rule out an interim trade pact with China. The two sides are preparing for fresh talks aimed at resolving the protracted trade war which has been roiling financial markets and threatening to push other economies into recession.

The Yuan is near four-week highs against the Dollar, while the Euro swung wildly yesterday, having initially tumbled after the European Central Bank’s surprise decision to resume government debt purchasing at a rate of €20 billion a month from 1 November to support a flagging economy.

The ECB also cut its deposit rate by 10 basis points to a record low of minus 0.5 per cent, but this was less of a surprise. The single currency managed to claw back the losses as the ECB’s comprehensive stimulus package now shifts the spotlight to the Federal Reserve and Bank of Japan policy meetings next week.

Financial markets have fully priced in a rate cut at the Fed’s meeting on 17–18 September. Most economists expect additional monetary policy easing in October and December, despite Trump’s public criticism of the Fed for not cutting rates more aggressively. However, positive economic data cast some doubt on the need for extensive easing.

The BoJ is also brainstorming ways to deepen negative interest rates to commercial banks at minimal cost as the main policy response to a slowing economy. Japan’ central bank will meet on 19 September.

In the short term, guarded optimism around a US-Chinese trade war resolution should continue to push Treasury yields higher and weigh on safe-haven currencies. However, this confidence could be short-lived, given the Fed is widely expected to cut interest rates next week while the ECB’s easing places pressure on the BoJ to follow suit.

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