In September, the stock and currency markets calmed somewhat amid de-escalation of geopolitical tensions in the Middle East and increased optimistic sentiment regarding the upcoming round of US-China trade negotiations.
Two weeks later, the United States may again increase duties on Chinese imports, but investors in the stock market and forex this does not seem to bother, but in vain, the leading Wall Street banks warn.
"We are becoming increasingly convinced that in the absence of constraints, the escalation of the trade conflict will continue in the medium term, which means that any pause will be short-lived. Investors should take into account that all announced measures (that is, raising fees on October 15 and December 15) will be taken sooner or later, even if the parties announce their postponement," said strategists at Morgan Stanley.
They noted that recent rounds of trade negotiations between the United States and China have been followed by higher duties, rather than easing tensions.
"Despite the fact that trade negotiations have recently been presented as constructive, and the postponement of the introduction of certain duties has inspired some optimism among investors, we do not expect the White House to make any compromises to conclude a trade deal if the economic situation and financial conditions in the United States remain favorable," Citigroup economists said.
"In addition, a semi-annual report by the US Treasury will be published in October. This department has already recognized China as a currency manipulator, and now the US Department of Commerce can clarify its position. If the latter considers that the depreciation of the renminbi is similar to subsidizing Chinese manufacturers, then this will open the way for Washington to increase duties, "they added.
"Recently, a new element has been added to trade negotiations, namely the prospect of impeachment against Donald Trump. Under these conditions, an insight can "descend" on the owner of the White House, which will encourage him to conclude a compromise deal and end the trade war. However, the opposite scenario is also possible: Beijing, understanding the vulnerability of the position of the US president, can not only slow down the negotiations, but also ask for another increase in the expectation that another year of confrontation will increase the likelihood of Trump losing in the 2020 elections," JPMorgan analysts said.
An optimistic attitude regarding the resolution of the US and China conflict undermined the defensive yen.
The USD/JPY pair has been growing for the fourth consecutive session and reached two-week highs in the region of 108.40.
However, according to some analysts, the Japanese currency will still surpass competitors from the G10 in growth rates and by the end of the year will rise in price by almost 3%, to 105 yen per dollar.
"The situation in the world can be described as an unstable balance, which, in our opinion, will serve as a source of volatility and lead to a fall in risky assets, as well as to strengthen the yen," said strategists at Morgan Stanley.
"The probability of a global recession in the next 12-18 months exceeds 50%. Assets like the Japanese yen will show a significant rally in the event of a crisis or global recession," according to Allianz Global Investors.
Analysts call the limited possibilities of the Bank of Japan in terms of monetary stimulus as another factor in favor of the yen's potential growth
"Compared to the Federal Reserve's ability to cut interest rates, the Bank of Japan's potential looks modest. In the Land of the Rising Sun, bets are already in negative territory. At the same time, the BoJ owns a huge share of bonds (45% of the domestic market). This means that, in terms of quantitative easing, it has fewer opportunities than the ECB," representatives of BNP Paribas said.
"If the Fed easing monetary policy cycle leads to a drop in the federal funds rate below 1%, this will help the Japanese currency rise to 90 yen per dollar," RBC Capital Markets said.
Meanwhile, the EUR/USD pair continues to go down, updating levels that it has not visited since May 2017.
Today, the main currency pair sank to two-year lows around 1.0880 amid a growing gap between macroeconomic data from the US and Europe.
According to the final assessment, the PMI in the eurozone manufacturing sector fell from 47 points in August to 47.7 points in September, reaching its lowest level since October 2012. Recall that the preliminary estimate was 45.6 points.
At the same time, inflation in the region unexpectedly decelerated last month.
According to Eurostat, in the reporting period, consumer prices in the eurozone rose by 0.9% in annual terms against the growth in August by 1%.
The market understands that if the indicator continues to remain at such low levels, the ECB will be forced to take additional mitigation measures, despite the recent reduction in deposit rates and the launch of a bond purchase program. These expectations continue to put pressure on the euro.
GBP/USD is trading below its peak on September 20, close to 1.26, as fear of Brexit without a deal again engulfed investors, so the pair tends to decline.
RBC analysts say that a break below the moving average over the past 50 days, which is at 1.2259, will lead to a drop and testing of the next support at 1.2198, but in addition to this, you should also have 1.20 in sight.
"Opponents of British Prime Minister Boris Johnson use everything that comes to hand against him: now he is even accused of abuses as mayor of London. The pound sterling is digesting all this well so far, but long-position holders can only hope that Johnson and the European Union are approaching a deal or, if this has not succeeded yet, at least a delay in Brexit is guaranteed," Saxo Bank analysts said.
According to The Times, B. Johnson intends to ask the European Union to exclude the possibility of further postponement of Brexit in a new agreement with the EU.
According to the publication, in the framework of the draft new agreement, the British prime minister will offer the EU an alternative to the so-called "back-stop", which will make it possible to both avoid checks on the Irish border and also control the movement of goods and transport through it. At the same time, B. Johnson privately made it clear that the agreement should include the obligation of the rest of the EU countries to impede the postponement of Brexit.
Thus, the British Parliament may face a difficult choice: either vote for the agreement reached by B. Johnson, or Great Britain leaves the EU on October 31 without a deal.
