Risk-on flows as US-China trade hopes rise once more

Summary:

• US stocks lead the gains after positive trade remarks

• FTSE lags due to further GBP recovery

• Precious metals tumble; Oil rises on inventory draw

• Strong US data contributes to upbeat sentiment

• NFP release in focus

Once again US indices are trading firmly in the green midway through the US session with more positive noises coming out of both the US and China on the trade front and boosting equities around the globe. The markets continue to look through the negatives and focus on the positive and even if this seems irrational it is clear now that the bulls have regained control of the tape and will be looking to press home their advantage. 

The leading UK stock benchmark is standing out like a sore thumb this morning, with the FTSE trading in negative territory while many of its peers are enjoying another leg higher. The Eurostoxx50 and US stock futures are both trading at their highest level in just over a month and after a tumultuous August, investors may now be starting to feel that the worst of it is behind them and begin to hope for further upside ahead.

The cause of this divergence is a further recovery in the pound with sterling now trading around 3% higher than Tuesday’s low against the USD, and quite remarkably the currency has now recouped around a quarter of the declines seen since the high seen at the start of May. The last couple of days since parliament returned from its summer recess have been dramatic, even against the high bar set by UK politics in recent years. After making his move last week by proroguing parliament, Boris Johnson is now on the back foot once more after MPs have voted to pass a bill that essentially significantly reduces the threat of a no-deal Brexit and thus renders his negotiating position with the EU as far weaker - at least in his own eyes.

There’s been some big moves in the commodity complex this afternoon with the risk-on feel that caused stocks and yields to rise causing some panic selling in precious metals. Silver was the worst hit and down by 5% at one point, and even though there’s been a bit of a bounce since the market remains firmly lower on the day alongside Gold and Platinum. Elsewhere Oil has built on strong gains yesterday, moving above the $62 a barrel mark after the weekly inventory release showed a larger than expected drop of 4.8M. This is even more supportive of price when you consider that last night’s API showed a surprise build of 0.4M and US production also ticked lower for good measure. 

 The employment change came in at +195k vs +148k exp, although some of the gloss was taken off this with the prior being revised down by 12k to +142k. It is also worth noting the break down of jobs with service providing to roles accounting for the vast majority (+184k vs +146k prior) and goods producing (+11k vs +9k prior). Not long after the ISM non-manufacturing PMI rose to 56.4 vs 54.0 exp and 53.7 prior. The overall tone from both releases is clearly positive but one small note of caution may be found in the ISM employment component which came in at its weakest level since March '17 - something to watch ahead of tomorrow’s NFP.

Our NFP preview can be read in full here.