Proposed US-China trade and Brexit deals have spurred investor excitement – and once again, it’s premature

Investors can’t help but get excited hearing that deals resolving Brexit and the US-China trade war are on the cards But their optimism fails to account for the frail foundations both deals rest on, and that neither is the first of its kind to fail

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Then British foreign secretary Boris Johnson shakes hands with US President Donald Trump at the UN headquarters in New York in September 2017. Trump rode to the presidency on a hard-line position towards China, much as Johnson became British prime minister thanks to his stance on the European Union, and now it’s unclear whether either can resolve those disputes. Photo: AFP

Published: 9:00pm, 17 Oct 2019Updated: 9:00pm, 17 Oct 2019

Hope springs eternal, especially in financial markets where the “fear of missing out” – known in the investment community by the acronym “Fomo” – on a rally can be a powerful driver of sentiment. Over the past several days, Fomo has been very much in evidence.

Since October 10, the British pound has surged more than 5 per cent against the US dollar, to its highest level since mid-May, and has not been this volatile since the days following Britain’s vote in June 2016 to leave the European Union, according to data from Bloomberg.

Mounting expectations that Britain and the European Union will strike a deal at a two-day summit beginning on Thursday, allowing Britain to exit the bloc with a negotiated settlement in place to smooth the transition to a new trading arrangement, have fuelled a sharp recovery in sterling, which is living up to its reputation as a “political currency”.

Signs of progress in US-China trade negotiations have provided an additional fillip to markets. A limited deal, tentatively reached last Friday – which would see Washington hold off on a further rise in tariffs planned for this week in exchange for minor concessions from Beijing – has reinforced investors’ belief that President Donald Trump is under more pressure to agree a truce with China to improve his chances of re-election.

The cautious optimism over trade has triggered a sell-off in gloomy government debt markets, with the yield on the benchmark 10-year US Treasury bond up 20 basis points since last Tuesday. However, the flip side of Fomo is complacency.

Apart from the obvious fact that investors have had their hopes dashed many times before – the previous trade truce only lasted from early December to the beginning of May, while the first Brexit deal was rejected three times by the British Parliament – the damage wrought by the trade war and Brexit is already done.

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