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Risk tone in markets deteriorated Thursday under the strain of Brexit and US/China trade talks.

Currencies such as the kiwi and Aussie started to track lower as headlines around US trade negotiations with China in Washington lowered expectations that any significant deal would be made. Direct via Chinese media was news the Chinese delegation refuses to talk about technology transfers a key part of the negotiations for China. Higher level talks are only expected to last one day (Thursday) with the Chinese team leaving soon after. Dampening Chinese spirits ahead of the talks was the US blacklisting of 28 Chineae companies this week which upset Chinese officials. China were keen and willing to consider a partial deal based on them buying more agricultural products in return for the US to cancel some of the current tariffs in place. 

The Federal Reserve Minutes pointed to economic outlook risk management and inflation objectives. Trade tensions, geopolitics and the global economy weakening were the main points. Several policy makers suggested keeping rates steady saying forecast economic projections had not changed and would not affect ongoing expansion. Other members saw the opposite with further rate cuts needed to boost future expansion. The single best indicator of “recession” is an inverted yield curve. At the moment the short term rates cross (invert) the long term rates at around the 5 year maturity. This is particularly bad as the Fed increases short term rates this pushes the long term ones lower spooking investors. Every US recession since 1950 (all nine) have been preceded by an inversion in the yield curve. The most closely watched is the rates between the 2 year and 10 year. 

More detrimental US economic data published overnight with the wholesale cost of goods and services posting the steepest monthly decline since January signaling inflation is set to remain at low levels for a while.

Sentiment in Australia is at the lowest levels since July 2015. The index has dropped over 8.0% since the RBA started cutting rates in June. This drop in particularly relevant with the RBA cutting 75 points since May 7th 2019 with expectations that rate cuts are supposed to boost confidence on a personal, business and economic levels.

The Brexit boheimeth rolls on another week with more headline predictions of how things could eventuate. Chief EU negotiator Barnier has said “we are not really in a position where we can find an agreement”. The Northern Ireland backstop remains the biggest concern with Boris Johnson and the Irish prime minister meeting later in the week to try and resolve the widening gap. Overnight the Pound has bounced higher on the news of a compromise to the Irish backstop with Britain offering a dulled down trade agreement to be negotiated by the end of October. Ireland’s prime minister has said the mood is positive. Perhaps a deal is now a possibility with a compromise from all parties.

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