Another hiccup?

Today's news headlines:

‘Saudi Crown Prince says Iran war would bring down global economy’. Prince Mohammed Bin Salman has warned a war between Saudi Arabia and Iran could lead to a total collapse of the global economy, stressing that he prefers a non-military approach to prevent Iranian ambitions. The Prince also claimed an outright war would send oil prices to highs not seen in our lifetimes and called for a political solution involving both the US and Iran. (Bloomberg)
‘Sajid Javid pledges infrastructure spending on roads, buses and broadband’. British Finance Minister Sajid Javid has pledged an investment package worth billions of Pounds ahead of an expected general election. The package includes five billion Pounds for improved broadband for UK residents, a strategy to enhance bus services nationwide and plans for how billions already set aside will be allocated for road infrastructure. (Thomson Reuters)

Looking behind the headlines

Following a series of negative, risk-off days for the market, this morning has started on a more neutral footing. Sure, at first glance there are reasons to remain pessimistic, but none of this is really new information and therefore doesn’t merit a market adjustment.

Firstly, there has been another hiccup in the US-China trade dispute after it was rumoured that the Trump administration was looking to limit portfolio flows into China, which means it was looking at measures to dissuade investment going into China. Predictably, the Chinese responded with assurances that they would continue to open their markets, which was most probably their intention anyway. On the surface, this may seem like a fresh hurdle to progress, but at the moment, it is merely rhetoric, and the Chinese visit after October 7th seems a more tangible sign of forward progress.

Two weeks ago, the Saudi Aramco infrastructure attack caused a massive spike in oil prices—Brent Crude jumped nearly 20% over the weekend. Since then, we have received a to and fro on repair estimates and a resumption of productive capacity. Ultimately, the supply impact on the market was judged to be modest, and security questions posed by the success of the drone strike have resulted in the adoption of credible preventative measures. Less noticeable is a decline in demand which is exerting downward pressure on prices, causing them to return to pre-Aramco levels. The impact on consumers is, therefore, likely to be modest, which is great news given the broad-based downshift in global growth.

Bottom line: Headlines seem to extend the negative sentiment, but none of these headlines reflect anything genuinely new about the current economic situation. Overnight, Chinese sentiment data was both expansionary and better than anticipated. While no one rationally expects a change in trajectory, the recent series of unrelenting bad data was bound to be an outlier. We were also concerned about the October 1st retail tax hike in Japan, which seems ill-timed, but news of the fuller measures seems more neutral and, in some cases, more expansionary than expected. Not entirely bad news as we start the week despite a subdued market tone.

GBP/USD

Cable ended last week two cents lower at the 1.23 level following an increasingly gloomy Brexit outlook. The 50-daily moving average of 1.2266 provided support for the pair last Friday and may continue to offer support throughout the week. The trade-weighted Dollar Index sits near multi-year highs and may limit significant GBP/USD gains in today’s session.

GBP/EUR

Last week, the pair dipped below the 1.13 level which has provided significant support and resistance over the last two weeks. The pair ticked higher on the London open due to demand for Sterling as markets await key data from Eurozone nations and the UK.

EUR/USD

Following last week’s dip below the key 1.10 handle, the pair has hit resistance at 1.0950 as investors remain pessimistic about Eurozone economies and the European Central Bank’s ability to revitalise major European economies. Multi-year lows of 1.0905 could be tested again today following German and Italian inflation data out this morning.