The more UK Prime Minister Boris Johnson gives ground to the EU, the harder the sell to the ERG and DUP. Photo: AP

INTERNATIONAL – This morning, European markets are weaker as investors take a breath and realise is there is not much in this trade “deal” to get excited about. 

Some softer China data and a lack of progress on Brexit are not helping much. The FTSE 100 has dipped about 20 odd points. Banks, which had been bid up to the nines on Friday because of hopes of a deal, are off sharply today, as are homebuilders. 

RBS and Lloyds were down about 3 percent as hopes of a Brexit deal dwindled – or at least the euphoria of Friday turned into a bit more of a cold Monday morning in October.

Wall Street rallied into the weekend as the US and China called a truce in their long-running trade war. 

Described as a ‘phase one’ deal by president Trump (but not by China), the US will hold off raising tariffs that had been planned to increase on Oct 15th, in return for concessions from China mainly on agricultural products. But for all it’s billing the scope of this is very limited. 

No existing tariffs are being lifted; China has not mentioned buying more US agricultural products. Tariffs due to increase on Dec 15th. 

A temporary reprieve, it helps for sure, but this is a deal that only fixes a couple of dents in the wreckage. The S&P 500 rallied 1 percent to 2 970 but closed off its highs of the day as investors realised the deal isn’t all that. 

The Dow put on more than 300 points to close the week at 26,816. European equities also basked in the warm glow of the trade truce. The DAX in particular benefitted and rallied 2.5 percent. 

Markets will now have to see whether corporate earnings are as nasty as some fear. Higher input costs, rising wages, lower interest rates, tariffs and a synchronised global economic slowdown are all factors likely to weigh not just on the third-quarter scorecards but also on guidance for the rest of the year. 

Friday’s trade deal really does nothing to change the outlook for US businesses. 

Banks kick off the season proper this week (see below). Financials posted decent gains in the fourth quarter, boosted by a strong +4.5 percent gain in September. 

Year-to-date gains of about 12 percent lag the broad market but nevertheless, in the face of declining rates and falling trading revenues, banks have shown resilience. 

Net interest income is the number one metric we will be paying attention to as banks have to trim their expectations for where US interest rates will be. 

Sterling has softened as complicated Brexit negotiations have yet to produce a result. The lack of progress has just taken the shine off things a touch but the market remains ever hopeful and there’s support as long as talks are still going. 

The more UK Prime Minister Boris Johnson gives ground to the EU, the harder the sell to the ERG and DUP. Labour seems all but certain to block whatever the government agrees with EU.

It will be a very choppy few days for the pound. The pound versus the dollar has slipped back to 1.2550 having touched 1.27 on Friday following its two-day blast higher. 

At last look it was testing the 1.2580 region of support, the July and September highs, having bounced off its lows. Speculators have again cut their net short positions.

Gold is on the back foot as risk was bid. The $1 480 support has been tested and breached but holds again for now. 

Oil continues to feel the downward pressure of slowing economic growth, with WTI failing to catch much in the way of bid above $54. 

Speculators continued to unwind long positions, with net long positioning down c34k to 355k. At the moment geopolitics is providing brief upside rallies but medium- and long-term supply and demand dynamics point to ongoing weakness.

Neil Wilson is the chief market analyst at Markets.com.

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