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The damage already done

​​​​​Today's news headlines:

  • ‘John Bercow says he will stop Boris Johnson from closing Parliament to secure Brexit'. Yesterday, House of Commons Speaker John Bercow, said that he'd refuse any attempt by Boris Johnson to suspend Parliament in order to take Britain out of the EU without a deal. Meanwhile, senior government figures report that the EU is waiting to see the outcome of any Parliamentary bids to prevent a no-deal before it considers making amendments to the withdrawal agreement. (The Telegraph)
  • 'China says protesters like "terrorists", airport reopens'. Government protesters in Hong Kong are no different from terrorists, according to China's liaison office for the region. This comes after the second day of violent airport protests, which has forced hundreds of flights to be cancelled. The Beijing based Hong Kong and Macau affairs office said the crimes must be severely punished by law. Meanwhile, President Donald Trump said that the Chinese government was moving troops to the Hong Kong border and urged calm. (Reuters)

A temporary sigh of relief

The decision by the US to delay further tariffs on Chinese imports may bring a sigh of relief to markets, but overnight data from China reminded us of the damage already done. The ongoing US-China trade war has been a major contributor to the global economic slowdown, and global supply chains have so far been hit the hardest. Earlier this month, Trump's announcement of tariffs on the remaining 10% of Chinese imports rattled markets as the force of the trade war turned to the consumer. Yesterday, following talks between the US and China, it was announced that these tariffs will be pushed back from September to December. The immediate market reaction was a fall in safe-haven currencies such as the Japanese Yen and the Swiss Franc, which had rallied since the original announcement of the September tariffs.

Overnight data from China posed a reminder of the lasting damage that the trade war has inflicted and warns of the potential damage to come from the December tariffs on consumer goods. The world's second-largest economy posted its weakest industrial output growth since 2002, and retail sales continued their downward trend. While markets may breathe a sigh of relief from the tariff delay, Chinese policymakers will remain cautious as they prepare for December and will continue to weigh up measures to stimulate the slowing economy.

Bottom line: Amid the chaos of tariffs and weak economic data, the Chinese Yuan is also being watched closely. China's fixing of the Yuan is an important tool for policy intervention, and a prolonged devaluation could stimulate their deteriorating economy. The caveat is that this decision is likely to fuel Trump's anger and puts China at risk of more economically damaging measures by the US.

A difficult phase

A climate of slowing global growth and future uncertainty over protectionist measures has weighed on Europe's manufacturing powerhouse. The German economy contracted in the three months to June 2019 as GDP growth data came in at -0.1%. The weak figure was mainly caused by a plunge in industrial production of 5.2%, and exports which have fallen by 8.0% in the past year. A further matter for concern is the ZEW economic sentiment survey, which asks institutional investors and analysts to rate the six-month outlook for the German economy. The figure released yesterday was -44.1, the most pessimistic forecast since December 2011. Given the sizable drag from industry, the service sector is likely to have expanded at a relatively healthy rate for the overall economy to have only contracted a small amount—so maybe there's some light at the end of the tunnel.

Calls for fiscal stimulus will now come into the spotlight, and Chancellor Angela Merkel has already signalled her willingness to intervene in tackling the slowdown. Merkel said that Germany was entering a 'difficult phase' and would 'react depending on the situation' although she doesn't agree with a growth package just yet. A softening of rhetoric by Merkel is an indication that Germany may eventually agree to the European Central Bank's plea for government help in stimulating growth. Currently, German GDP is forecast to grow by 0.6% this year, but those expectations can be scaled back after the recent slew of negative data. Right now, GDP is less of an outright drama and more of a warning shot, but one more quarter of contraction will put Germany into recession. Under the constitution, this would unlock some financial firepower currently out of politicians' reach.

Bottom line: The global economy is slowing, and the risk of recession is starting to take hold in Berlin. Germany has a complicated relationship with deficit spending but having already slashed debt from 83% of GDP to 60%, they may yet lean on public finances to create some economic momentum.


Yesterday's news of a delay to further tariffs on China had little impact on the pair which is still dominated by Brexit news. The pair tested the 1.21 for the second time this week but failed to find ground at the big figure. With support at 1.2040, GBP/USD continues to trade in a tight range.


With Brexit-related news being the primary driver of the Pound, European data may be the leading driver in today's session with Eurozone GDP out this morning. In yesterday's session, the pair tested 1.08 for the second time this week but failed to close above the level. While data might cause some intra-day volatility, downside risks to Sterling from Brexit will likely be the prevailing force driving the pair over a longer time frame.


Yesterday, the pair weakened back below 1.12 following stronger-than-expected US inflation and trades at the bottom of its two-week trading range in today's session. Eurozone GDP data out this morning could break the pair out of its recent tight range.