All major US indices are reaching new all time highs because of renewing optimism of a trade deal between the US and China. China’s Vice Premier indicated he want’s tensions to deescalate and significant progress to made in new scheduled trade talks in October. Trump has signaled willingness for an interim trade deal in which a portion or more of tariffs could be removed if China gives concessions on intellectual property theft legislation. All signs indicate Trump is beginning to cave in the face of a slowing world economy and he realizes his election hopes hang on whether the US economy remains red hot heading into 2020.
Next thing to look for include a Federal Reserve rate cut next week. The Fed is expected to cut another 25 bps to stimulate the US economy and markets. Jerome Powell is in the unenviable position of having to balance keeping the economic expansion going and maintaining market expectations. The US economy is still growing north of 2% and it is questionable to cut rates while the economy is still expanding. There is a running argument about whether the Fed needs “bullets in the chamber”, which would be additional rate cuts to deal with any future economic slowdown. If the Fed Funds rate hits 0% before we are anywhere near the peak of a recession, we could be set up for a prolonged period of economic slowing. The purpose of rate cuts is to be an emergency measure to stave of economic collapse and regain consumer confidence, not so much to continue an extended market expansion and rally.
EU and Brexit
The ECB cut rates to negative fifty basis points, which is 10 bps lower than before. The ECB also announced they would resume buying bonds to the tune of $20 billion starting in November. Europe is slowing, their demographics are aging and creativity seems to be lost. Of all developed markets, the Eurozone remains the worst to invest in. Growth expectations are near 0.5% and they have been over the last decade. Stimulus did nothing and the ECB has turned the Eurozone into a uninvestable market with negative interest rates. The only country worth anything in Europe is Germany and their manufacturing production has contracted over the last few months.
With Brexit set to take place in October, the U.K.’s Trump “Boris Johnson” is undergoing calamity after calamity since taking the helms of Prime Minister. Through all the calamity Boris Johnson has been adamant about one thing, Brexit is expected to take place on October 31st whether the UK has a deal or not. Since taking office Prime Minister Johnson has lost the majority in his conservative party in the House of Commons which hurts his chances at having a snap election. He has instituted a 5 week recess in Parliament so he can push through Brexit, while being accused of misleading the Queen to push through the recess. All in all this is bad news for the GBP/USD as it has fallen to historically low levels of 1 pound to 1.23 dollars. Analysts have stated if a referendum can be created to revote on Brexit and the British elect to stay in the EU, the GBP/USD could rally to 1.40~1.50. Brexit will end badly if Johnson forces a leave from the EU with no deal. There has been and will be additional exodus of capital and investment to the EU.