Rabo: "Don’t Expect A 'Risk-On' Rally To Be Sustained On Any Short-Term Deal"

Submitted by Michael Every of Rabobank

Markets are saying ‘Happy Friday’ on a variety of key fronts as deals gain wheels – for now. But we aren’t at the weekend yet, and not all weekends are as relaxing and enjoyable as one would hope.

In Europe after a long meeting, including some one-on-one time, the British PM and Irish Taoiseach Varadkar managed to achieve enough of a breakthrough on Brexit and Northern Ireland that the latter declared there is a “pathway to a possible Brexit deal.That comes as a surprise to sceptical EU officials, to Angela Merkel, who allegedly wants Northern Ireland to remain in the Customs Union forever, and to British opposition parties who publicly declare Boris Johnson is a bumbling, nationalist rogue agent who cannot be trusted to tie his own shoelaces. GBP obviously loved the news, surging back from 1.22 to 1.24. Yet now comes the hard part: trying to explain exactly what that pathway to a possible Brexit deal actually looks like. Is that pathway a border in the Irish Sea that leaves the DUP on one side and BoJo on the other? So many questions, and so few answers – but also so few possible answers.

For BoJo, however, it must surely take some of the pressure off on at least one key front. That’s also as an exclusive poll in the Torygraph Telegraph shows that the PM can only win a majority at the next election if he delivers Brexit by 31 October: any delay, even if it leads to a No Deal Brexit, or to Article 50 being repealed and Brexit cancelled, would instead see the next election produce a hung parliament and more years of drift and chaos. But get the UK out by 31 October and BoJo will win a huge majority of over 100, apparently. One perhaps sees why he is being so determined: and one also sees why, from a parliamentary perspective, Labour and the Liberal Democrats might want to stop this apparent breakthrough from happening. So, all to play for still.

In the US we have been whipsawed by US-China trade headlines. Once again they are back in sunshine territory with suggestions some kind of mini-deal could be done. Even President Trump tweeted “Big day of negotiations with China. They want to make a deal, but do I?” and that the first day went “very well”. That was enough for stocks to rally, US 10-year yields to rise 8bp, and CNH, which had been near 7.16, to rally back to under 7.10. Given the high-level of Chinese representation in the room for today’s negotiations, everyone will be asking “What will He say?” (zeitgeist-ily pronounced “Her”). Indeed, what is Vice-Premier Liu He offering this time round? Market expectations are suddenly that we will get a mini-deal of Chinese agri purchases and perhaps a further delay in the imposition on some of the scheduled increase in US tariffs.

CNY will be happy if so, but that’s hardly a game changer. Indeed, in the background we have the NBA issue still snowballing; Trump happy to see supply-chains leave China; an expanding tech cold war; crackdowns on Chinese scientists working in the US; US visa restrictions related to Xinjiang; Chinese visa restrictions on some from the US; Hong Kong; rumors of US capital controls into China and from Chinese firms; and the Pentagon looking to place ballistic missiles aimed at China somewhere in the region. Unless that changes too, any potential short-term deal that is struck here doesn’t stop the overall US-China dynamic that is emerging; it would just be a short-term, election-focused ‘Nasty-Soviet Pact’. (And the original Pact also involved soy bean sales.) In short, don’t expect risk-on or CNY rallies to be sustained. We certainly expect any accord to try to keep CNY stable to be unrealistic in the current circumstances, as noted in LOL-A-PLAZA!, which was published yesterday.