Feeling the force

​​​​​​Today's news headlines:

  • ‘Fate of Brexit is up in the air as Johnson delivers surprises’. Parliament is due to reconvene tomorrow in what promises to be an important week in Brexit. Boris Johnson’s goal is to continue in power and unite hard-line Brexit supporters while opponents are divided. It remains to be seen whether the EU will offer the UK any further concessions though. Meanwhile, the EU’s chief negotiator Michel Barnier told the Sunday Telegraph that he’s ‘not optimistic’ about avoiding a no-deal. (Bloomberg)
  • ‘Hong Kong braces for general strike after chaotic weekend’. The region braced itself for a general strike on Monday, a day after protestors blockaded the city’s international airport, capping a weekend of intense clashes. Riot police had to clear a large number of demonstrators that had closed off routes into the airport with bikes, trolleys, and traffic barriers. This followed an evening of chaos on Saturday when rioters besieged the city’s government offices and set fire to barricades. Police responded with water cannons, rubber bullets, and pepper spray. (Financial Times)

Unchartered territory

The ongoing US-China trade war has entered new territory where the consumer will feel the force of the Trump administration’s tariffs. The latest tariffs to come into effect are a 15% duty on goods such as clothing, home textiles, and technology products. This will be in addition to a set of 15% tariffs on consumer goods due to be implemented on 15th December 2019. The most recent trade war development is of particular concern for market participants since they are targeted directly at the consumer—previous tariffs had primarily affected supply chains—and the consumer has arguably provided the most support in a deteriorating global economy. 

China’s government has signalled it has a variety of tools at its disposal to provide economic stimulus where needed. Other nations around the world do not have such a privilege as the effectiveness of cutting interest rates closer to zero—or negative in some economies—is questionable. This morning, the market reaction is mixed; equities in Asia have ticked slightly lower with the exception of China’s CSI 300 Index, while the safe-haven Japanese Yen climbed slightly overnight. China’s most important sector, manufacturing, is showing signs of bouncing back from the slump partly caused by the trade war with the US. The latest Chinese Caixin Manufacturing Purchasing Managers’ Index indicated an unexpected expansion in the sector, which may provide a small boost to sentiment. However, the latest set of tariffs sends the trade war into unchartered territory, which may end up inflicting more damage to the global economy than in previous months.

Bottom line: We still see uncertainty looming over the Chinese growth outlook despite the strong manufacturing figure for August. Fiscal support will be in the pipeline but is unlikely to offset the headwinds of weakening global demand and a pullback in investment in infrastructure and property construction.

GBP/USD

The pair has opened the London session with heavy GBP selling pressure as concerns of a no-deal Brexit return. Cable is back to the 1.2100 figure for the first time since 20th August, and this morning’s poor UK manufacturing PMI reading may exacerbate this downward move.

GBP/EUR

This morning’s GBP descent has been greater than the EUR move, meaning the GPB/EUR pair is lower overall. While the Pound and the Euro have dipped below key levels against the US Dollar, GBP/EUR has kept above 1.10, a level that heavily supported the pair last week.

EUR/USD

The pair continues to trade below 1.10 following Friday afternoon’s dip from month-end flows. The move below 1.10 highlights confidence that the European Central Bank will provide stimulus to the Eurozone next month. With the Dollar Index opening higher this morning, EUR/USD is likely to remain at these low levels.