One Tweet away from more tariff threats

Today's news headlines:​​​

  • ‘Warning PM rivals, Hammond says no deal would swallow Brexit war chest’. Chancellor Phillip Hammond warned Boris Johnson and Jeremy Hunt that leaving the EU without a deal would use up the Brexit war chest of £27bn. Both have promised to increase spending and cut taxes if they became Prime Minister, but Hammond commented: ‘The “fiscal firepower” we have built up in case of a no-deal Brexit will only be available for extra spending if we leave with an orderly transition’. (Reuters)
  • ‘EU summit ends in deadlock over filling top jobs’. EU leaders failed to agree on new leadership for the European Commission and other top EU institutions after 20 hours of talks. French President Emmanuel Macron criticised the debacle for diminishing the credibility of the Union. Mainstream centre-right and centre-left parties have lost ground in recent EU elections, resulting in a more fractured political system. (Financial Times)

RBA strikes again

The current economic climate of slowing growth has led financial markets to price in interest rate cuts from major central banks around the world. A rate cut from the Federal Reserve in its next meeting is fully priced into the Fed funds futures market, and Treasury yields are at three-year lows suggesting investors expect lower interest rates.

So far, monetary policy easing has only been a talking point for most central banks, with the exception being the Reserve Bank of Australia (RBA). Overnight, the RBA made its first back-to-back interest rate cut in seven years to 1.0%, indicating weakening growth and global trade tensions are taking a toll on the Australian economy. The reaction has been positive for the Aussie Dollar as AUD/USD climbs back towards it 200-daily moving average, a key resistance level for the pair this year.

The RBA will hope for successful trade negotiations between the US and China since a third of Aussie exports are to the Asian giant. A solution to the trade war could be a key catalyst for the rebound of global growth, providing relief for the central bank. However, If the economic deterioration continues, the RBA has said further cuts will be needed.

Bottom line: The RBA is fortunate to have room for monetary easing as other central banks are not so lucky. The European Central Bank (ECB) is being forced to consider unconventional policies as it approaches the infamous zero lower bound, suggesting other forms of stimulus may be required. Successful negotiations in the US-China trade war may provide relief for central banks, but the positive effects will likely take months to filter through to the global economy.

Trade truce won’t reduce uncertainty

Equity markets rallied yesterday following the weekend’s trade truce between the US and China. The S&P 500 and Dow Jones Industrial Average moved over 1.0% higher around the opening bell as both surged to all-time highs. However, once the rally fades, and we’re forced to look ‘under the hood’, we might find that the fundamental data still looks worrying. Yesterday’s US ISM manufacturing figure recorded its lowest reading since 2016, and based on orders, seems to be decelerating towards a period of contraction in the sector. Combine this with poor EU, UK, and Chinese Manufacturing Purchasing Managers’ Index (PMI) levels, and suddenly, the words ‘trade truce’ do little to allay fears of an underlying global downturn.

The truce certainly makes for a nice story and a good photo op for President Trump, but it doesn’t change much in the current US-China trading relationship. An impulsive 140 or 280 characters later and new tariff threats could be back on the table. Realistically, a deal will require concessions to be made, and the defensive nature of both sides won’t just disappear overnight (unless Trump really needs a win going into 2020 campaigning).

Bottom line: A ceasefire isn’t necessarily progression and should be viewed with caution. Prolonged uncertainty will cause long-lasting headwinds to economic output. And it’s not just evident in the US-China trade war; the US is now considering tariffs against the EU. The impact of these uncertainty shocks could reverberate throughout the global economy longer than many imagined.

GBP/USD

The pair continues to trade below the 50-day moving average, pointing towards an extension of the downward trend evident since mid-March. With no fundamental data to be released, political uncertainty may continue to push the Pound lower.

GBP/EUR

Yesterday was a mixed day for the pair as the Pound Index initially fell following poor PMI data. Its recovery throughout the remainder of the day was met with a drop in the Euro Index, pushing the pair higher.

EUR/USD

The Euro trade-weighted Index fell in yesterday’s session following a plethora of poor manufacturing data. The pair continues to trade heavy this morning after the US mulled tariffs against the EU.