Prospect of Sino-US Talks Lifts Markets

• China open to US invitation for trade talks;

• Carney appears in Dublin after fresh Brexit warning;

• Lira steadies after CBRT hike but significant risks remain.

It’s been a more positive start to trading on Friday, with talks of new Sino-US trade talks potentially helping to lift risk appetite among investors.

Stocks in Asia ended the week on a high, with major indices recording gains of around 1% and those in Europe up by a slightly more modest 0.3% or so. US futures are roughly tracking those gains in Europe which potentially highlights the increased risk of a trade war for Asian markets compared to Europe and the US at the moment. Still, with Trump also apparently preparing to announce the next $200 billion of tariffs on China, who are responding with closer ties with US foe Russia, we are clearly not currently close to a resolution.

The US economy has been gathering positive momentum despite the risk of a trade war and today’s retail sales data is expected to provide further evidence of that, with spending expected to have risen by 0.4% last month. This would continue the steady trend of rising sales over the course of the year as consumers spend the additional income that tax cuts afforded them thanks to last year’s reforms.

Mark Carney is due to speak in Dublin this morning which is sure to attract some attention, coming a day after the Bank of England kept interest rates on hold and, arguably more interestingly, the Governor risk the wrath of Brexiteers with more gloomy predictions. Carney met with the cabinet on Thursday and laid out what the bank considers to be a worst case no deal Brexit scenario, which included house prices falling by 35%, something Brexiteers will be keen to stress is more project fear from a closet remainer.

I think there’s a good chance that Carney steers clear of Brexit forecasts when possible in the coming months for fear of being seen as interfering in the process. The central bank may also be planning a similar approach after raising interest rates last month and giving itself the freedom to take a step back now for the rest of the year.

The actions by the CBRT on Thursday appears to have had the desired effect for now, with the lira having since stabilized at around six to the dollar, which is still extremely high compared to earlier in the year but around 15% off its peak a month ago. While inflation is still expected to continue to rise from around 18% currently and the economy could face a tough recession, the moves by the central bank may prevent a much greater crisis.

The question now is whether President Recep Tayyip Erdogan will be willing to accept the central bank going against his wishes and raising interest rates, or whether he’s going to seek to control the central bank as well which could have devastating effects. We may have some stability in the near-term, which is welcome, but I have little confidence that this will last and feel a lot more needs to be done to reassure investors.