Last week, China threatened to retaliate against the US with tariffs of its own. This week the Asian nation is upping the ante by suggesting US trade delegates not bother returning to the negotiating table unless they are willing to make a deal. This morning’s market reaction is a continued decline in Asian equities, excluding the safe-haven Japanese Yen, counterbalanced by resilience from the US Dollar, which is trading near year-to-date highs. It is clear the trade dispute between the world’s two largest economies will remain in the short-run, which has prompted traders to continue their risk-off approach following last week’s trend.
Bottom line: Risk-off resumes as confidence in a quick US-China trade resolution fades – Asian equities slump as the US Dollar remains resilient.
The Pound Index fell almost 2.0% last week towards February lows as nervousness surrounding Brexit moved Sterling into a state of paralysis. Theresa May is giving her battered Brexit deal one last re-work to see if she can get it through parliament before standing down. Taking defeat for granted, the Conservatives have already moved on towards a leadership race that could end up with a hard-line Brexiteer in control. The prospect of a no-deal split has increased as the bookmakers’ favourite for the role, Boris Johnson, has yet to provide any public support for taking a no-deal off the table. Markets realise that the UK could be left with no other option than to choose between Jeremy Corbyn and Boris Johnson, neither would be particularly Pound positive. Among a backdrop of strong labour market data, Sterling looks to have bottomed out against the Dollar with the respective indices trading around recent highs/lows.
Bottom Line: The UK looks to have moved on from Theresa May’s premiership, with the focus now on the number of candidates vying to assume her role. Despite the Pound sitting at the bottom of its trading range, we’re at a crunch point in Brexit proceedings, so a breakthrough at the current level towards the lows from December last year remains in scope.
The Sterling trade-weighted decline since early May highs has been over 3.5%. When combined with a Dollar at trade-weighted year-to-date highs, the prospect for further declines on the pair is not persuasive. There is little data out today, and political risk has been driving markets in a risk-off direction at this morning’s open.
The pair has continued to trade lower over the past week, largely as a result of risk aversion. Not surprisingly, the Dollar has been the key driver of this move, and with a spartan data release calendar in the next few days, it is likely to continue.
EUR has continued to trade in a very tight range for the past week, but Sterling losses have pushed the pair to three-month lows. There is little EU data until the second half of the week, so political risk is likely to remain the key driver.