Empire strikes back

Todays headlines:

  • ‘Trump's China trade talks shift into slower gear as trust eroded’. Following last week’s US tariff increase on Chinese goods, the Chinese have quite vocally hardened in their negotiating position. This suggests a resolution is much further away than originally anticipated. (Bloomberg)
  • ‘Leading Tory backer switches support to Brexit party’. In a recent poll, Nigel Farage’s Brexit Party is set to win a 32% majority, materially increasing the likelihood of a no-deal Brexit. (Financial Times)

Trade talks drift into a stalemate

On Friday, the latest round of US-China trade talks ended without a breakthrough, leaving in place the higher 25% tariff on around $200bn of Chinese exports. Market reaction was muted because many believe this is a temporary setback, even though Trump heaped further pressure on the talks by urging China to act now or face a worse deal. For perhaps the first time, we’ve seen China push back. Vice Premier Liu has said that in order to reach an agreement, the US must remove all extra tariffs and ensure that the text of the deal is balanced to ensure the dignity of both nations. The Chinese media mirrored the US administration’s lines by accusing the US of wrecking negotiations, adopting the narrative that Beijing sought a mutually beneficial agreement, but Washington reneged on its word. The Bloomberg Dollar Index has risen on the open while markets await announcements of additional tariffs from the US.

Bottom line: This is largely a continuation of last week’s risk-off sentiment which tends to drive market positioning towards safe-haven assets. This has been somewhat balanced by profit-taking on toppy equity prices. The narrative is driving this overarching dynamic, stay tuned.

Political confusion

Everywhere you look, the political or economic situation appears to be in a state of limbo. Theresa May is still trying to win approval for her deal even as her party appears to be defecting to Nigel Farage’s Brexit Party. Talks between the US and China on trade agreements have stagnated as threats of new tariffs emerge. And tensions are rising within the European Union as next week’s election may result in a substantial amount of seat shifting by anti-EU parties.

There is a light week of data ahead, and political circumstances across the UK, US, and Europe seem unlikely to be resolved soon. The prevailing market dynamic of strong safe-haven assets seems likely to go on. UK markets will likely remain stagnant as slow Brexit talks continue to be the driving force behind the Pound. With the US expected to announce fresh tariffs today, the world awaits China’s response to see if it will fulfil US demands. Neither are encouraging for market risk appetite.

Meanwhile, EU politicians are too focused on upcoming elections to resolve any of the ongoing domestic issues. The status quo prevails.

Bottom Line:  With every key issue in a state of limbo we are really hoping the few economic data points this week can drive markets. Particular attention should be focused on German Industrial Production tomorrow and Chinese data on Wednesday.

GBP/USD

Last week, the Dollar traded sideways while the Pound weakened towards three-month trade-weighted lows. The mood from the weekend’s US-China talks is mostly a continuation of last week’s trend: the Dollar holding and the Pound under pressure.

EUR/USD

Following nearly two weeks of modest but consistent gains, the pair is sitting just at the 50-day moving average. Given the risk-off tone emanating from the weekend and the Euro’s trade-weighted position nearly 100-day moving average, further increases might be limited until further EU data is released tomorrow and Wednesday.

GBP/EUR

The Euro was the big winner last week, rising towards one-month trade-weighted highs. However, the risk-off sentiment from the weekend may limit this trend, especially considering the common currency is just under the 100-day moving average, which may act as a level of resistance to further appreciation.