US confirms tariff roll backs on China and boosts risk assets and BoE takes a dovish twist

What’s driving risk sentiment this morning?

Risk on trades are now firmly back on after a US Gov’t spokesperson says the first China trade deal would include a tariff roll back. This has now confirmed that both the US and China are currently set for signing the Phase 1 trade deal. There has been upticks in risk assets on the back of these comments.

This morning so far there has been tentative risk movements in the FX space and the Asian indices are showing losses:

Nikkei: -0.9%

Hang Seng: -0.66%

Shanghai Comp: +0.02%

ASX: -0.4%

The AUDJPY pair has been a good beneficiary and is a useful proxy for global trade. Expect buyers on pullbacks if the risk sentiment returns to positive this AM. Equity markets will signal that return, so watch the European equity space. Gains will indicate risk is back on for the European AM session.

What happened with the Bank of England  rate decision yesterday?

The Bank of England kept rates unchanged yesterday, but two dissenters voted for rate cuts. These were members Haskell and Saunders.  The BoE revised down forecasts for both growth and inflation:

Inflation in one years’ time now seen at 1.51% (vs Aug 1.90%), two years’ time 2.03% (vs Aug 2.23%) and three years’ time 2.25% (vs Aug 2.37%).

Risks to UK GDP growth now skewed to the downside in 2nd and 3rd years of forecast horizon.

In their statement the BoE indicated that policy tightening might be ahead:

“If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.  Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.” (bolding mine)

The slight dovish shift is not a huge surprise, but it is unexpected. Hence the fall in the GBP. Slowing growth and slowing inflation are common themes across the globe. The GDP data out next week will be more significant now that the BoE have raised concerns about slowing growth.