GBP sinks as Brexit deadlock persists, stocks in Asia launch new week lower

Summary:

• No fireworks at the annual IMF meeting

• Brexit talks fail to resolve key issue ahead of the leaders’ summit on Wednesday

• Stocks in Asia resume downward move after Friday’s bounce

The annual meeting of finance ministers and central bankers from the IMF member countries was not abound in too many surprises. As expected the discussion was mostly on topics like the impact of the trade war on the global economy or the value of the Chinese currency. When it comes to the former meeting participants reiterated previous warnings that in case the trade conflict is to continue it may take years to reverse the consequences and that it could cost the global economy as much as 0.8 percent of output in 2020. Apart from that, the attention was also paid to the situation in the emerging economies and how factors like Fed’s monetary tightening and stronger dollar affects them. Charles Quarles, the Fed member present at the meeting, said that the Reserve is fully aware that its decision impact EM. He continued saying that the only thing Fed can do about it is to be as predictable and transparent about its future policy decisions as possible so those economies can prepare for impending hikes. Problems mounting within the European economy were also discussed during the meeting. When discussing the latest controversial budget plan Giovanni Tria, the Italian Finance Minister, assured audience that the Italian government is not planning to dump euro and that its goal is to gradually shrink deficit. In terms of Brexit most meeting participants expressed hopes that the two sides of negotiations will eventually reach deal. However, Philip Hammond, the UK Chancellor of the Exchequer, said that the UK government is prepared to cut spending if needed in order to ease impact of the potential shock to the economy.

GBPUSD launched news week in the vicinity of 1.3080 handle, significantly below 1.3150 that closed last week’s trading. The prolonging stalemate in the Brexit talks may weigh on the pound in the days to come. GBP traders should pay double attention on Wednesday as EU and UK leaders will meet for a summit. Source: xStation5

Speaking of Brexit it is worth to mention that the GBP is the worst performing G10 currency on Monday morning and the progress in negotiations is a reason behind this. More precisely, the lack of it. At the beginning of the weekend everything was looking promising as Dominic Raab, the UK Brexit secretary, unexpectedly rushed to Brussels to meet with Michel Barnier, the EU top Brexit negotiator. However, despite intense talks the key hurdles towards the deal were still in place, including the Irish border issue. According to Bloomberg the negotiators will not sit for more talks this week. This means that issues will remain unresolved ahead of the EU leaders meeting in Brussels on Wednesday. Let us recall that this meeting was viewed to be a milestone and opportunity to struck a preliminary divorce deal or at least to announce that one will be signed in November. While most issues have been already resolved and small progress is being made on those that have not, companies are growing increasingly uncertain of the future of their UK branches. Having said that, we can expect more and more enterprises to start announcing that they are taking precautionary steps to limit the impact of potential no-deal Brexit in the months to come. Let us note that signing of the so-called Brexit divorce paper does not mean that the UK will break away from the EU in March next year. In case that paper is signed the 21 month grace period will begin in March and during these period UK and EU authorities will gradually prepare the economies to break away from each other and do it eventually. In case no deal is signed the UK economy will crash out of the EU structures with numerous current agreements ceasing to hold.

CHNComp (HSCEI futures underlying) failed to climb back into the range of the previous consolidation after it broke out of it last week. The 10000-10100 pts range saw some price action before and the reaction to this area may reveal who is the dominant market side now. Source: xStation5

Asian stocks launched new week with declines putting aside rebound we saw on the global equity markets on Friday. The biggest sell-off could be seen on the Japanese stock market what can be to some extent ascribed to the appreciation of the JPY. The Japanese yen along with the Swiss franc are the best performing currencies among majors reflecting a shift towards safe haven assets. Brent and WTI trade at $81.29 and $71.91 respectively.

In other news:

• Donald Trump warns that Chinese interference in the US politics is bigger than that of Russia

• Angela Merkel’s party loses absolute majority in Bavaria

• PBOC governor says yuan volatility is normal

• Leader of the Swedish opposition drops attempt to form a government

JAP225 (Nikkei futures underlying) unexpectedly moved to a new high at the turn of September and October. However, it was as quick to fall as it was to raise. The benchmark slumped from the vicinity of 24470 pts to around 22250 pts. Notice that the index broke below the 200-session moving average (purple line on the chart above) and is approaching the upward trendline. Source: xStation5