While risk assets are rallying on hopes of a US-China trade deal next month, Germany’s latest data release serves as a reminder that the economic damage already inflicted may be irreversible. News this week of fresh US-China trade talks in early October helped risk assets, such as equities, rally across the globe on hopes that trade tensions may finally be coming to an end.
This morning, German Industrial Production for July came in at -0.6% month-on-month versus an estimated increase of 0.4%. The disappointing release reminds us that Europe’s largest economy is in serious need of stimulus, especially if the buoyant service sector begins to deteriorate in line with the manufacturing and industrial sectors. Europe is not alone in this trend either. On Tuesday, the US ISM Manufacturing Survey showed a contraction for the first time in three years, while the US ISM Non-Manufacturing Survey indicated expansion.
Successful trade talks between the world’s two biggest economies will certainly relieve markets from heavy risk aversion. However, recent attempts have failed to muster a truce, let alone any resolution and any progress to the ongoing tensions will likely take months to manifest in a global supply chain recovery. Renewed risk aversion will likely prevail in the coming months as we see the probability of recession exacerbated by weak fundamental data.
Bottom line: A continued rally in risk assets may alleviate some pressure on central banks to deliver monetary easing as the risk of ‘falling behind the curve’ subsides. Although central banks around the world may have a bigger issue at hand—finding a unanimous decision on monetary policy. There’s currently a divide in opinion of policymakers in the Federal Reserve and the European Central Bank, and unless opinions align, central bank credibility may add to a growing list of concerns.
Yesterday, Sterling continued its three-day rally, having gained up to 3.3% against the Greenback. This was fuelled by markets scaling back expectations of a no-deal Brexit in October. The trade-weighted US Dollar Index has also pulled back from more than two-year highs over the past few days as broad risk appetite has returned to markets.
At best, the Pound has gained more than 4.0% in the space of a month from the lows of 1.0724 to a high of 1.1181. Geopolitical issues will continue to drive the pair, but we’re seeing a move towards crossing the 100-day moving average, which would be a bullish sign for the near-term outlook.
The US Dollar sell-off had supported the pair above the 1.1050 level but robust US ISM Non-Manufacturing data combined with disappointing German industrial production readings this morning have dampened the outlook. Markets will be looking towards the Non-Farm Payrolls figure, released later, as a point of price action.