Today's news headlines:
- ‘Global markets fall as China hits back at US with new import tariffs’. Chinese leadership has retaliated against recent US tariffs with a raft of their own. The amount is smaller, and the impact delayed, but the hardening stance is hitting equity markets, particularly in the emerging markets. (The Guardian)
- ‘Trump hails Orban for “tremendous job” defending Christians’. In classic Trumpian fashion, the US President has stoked disharmony in the EU by praising Hungarian leader, Victor Orban, who is at odds with the EU for eroding democratic checks. (The Times)
A European rebound
The intensification of the US-China trade war may provide some relief for weak European exports that have dragged down the Eurozone’s largest economy. Today the ZEW Expectations and Current Situation Surveys will be released for Germany, the largest economy in the Eurozone. So far this year, expectations have consistently improved, while the current situation looks to be bottoming out, a trend that is expected to continue. Also released this morning is the Eurozone’s Industrial Production number – a key indicator of the health of Europe’s manufacturing sector. The reading is forecast to retreat deeper into negative territory, the second consecutive negative reading. Given that the ZEW data is a leading indicator while Industrial Production lags in its measurement, the combined set points to a bottoming of growth in Germany.
Bottom line: Expectations surveys point to a bottoming out in recent German weakness, a trend that may be fuelled by ongoing US-China trade tensions. Chinese tariffs on US goods might leave the export-heavy Germans in a rather smart position.
Tariffs, tariffs, and more tariffs
Yesterday markets witnessed several significant developments from the US-China trade spat. China announced retaliatory duties on American imports, starting on June 1st, to the order of 25% on around 2,500 US goods. Talks are ongoing but US Treasury Secretary, Steve Mnuchin, is working on another trip to the Asian nation and President Trump will meet President Xi at the G-20 summit in Osaka at the end of June. While Trump has warned China against going too far in response to US trade actions, the US Administration is contemplating increasing tariffs on $300 billion in Chinese imports. Chinese equities and the Yuan have both been subject to steep declines, the Offshore Renminbi nearing 7 to the USD. US equities also sold off, the S&P 500 falling by 2.4%, its biggest one-day decline since January, while safe-havens ranging from gold, the Yen, and Treasuries all gained.
Bottom line: Chinese assets are under pressure while safe-havens flourish. The resolution to this issue isn’t necessarily around the corner. Speaking in terms of need, Trump doesn’t feel a particular sense of urgency given both the modest and delayed nature of the Chinese response. Perhaps more importantly, election campaign season doesn’t begin in earnest until the autumn, and he will benefit most by a fresh feather in his hat.
Overnight the Dollar ticked higher on risk-off sentiment, while the Pound continued its two-week descent. This morning, Sterling broke below the 100-day moving average on a trade-weighted basis. Today’s employment data is expected to remain at a strong pace but is unlikely to provide support for a currency weighed down by political uncertainty.
With the Dollar moving in a rather tight range of late, the Euro rally has driven EUR/USD higher to the 50-day moving average, which has acted as a strong resistance since the beginning of March. Since both the Euro and EUR/USD are reaching natural points of resistance, a greater impetus for appreciation is likely required to push higher.
The Euro continues to flirt with the 100-day trade-weighted high while GBP/EUR sits at a three-month low. Today’s ZEW and Industrial Production figures from Germany will be under immense scrutiny given the US-China trade-spat backdrop.