Question marks over easing’s effectiveness

Today's news headlines:

  • 'US threatens sanctions over Iran tanker after court ruling’. The US signalled its disappointment with the UK after a Gibraltar court allowed the release of an Iranian tanker suspected of delivering oil to Syria. Washington has threatened to sanction ports, banks, and anyone who does business with the ship or crew. The seizure of the tanker ignited an existing diplomatic row between Iran and the West over sanctions imposed by the US last year. American officials also questioned whether the UK would rather do business with the US or Iran, ahead of a proposed post-Brexit trade deal. (Bloomberg)
  • ‘Rival plans to stop no-deal Brexit clash, limiting their chances’. Yesterday, two rival campaigns were launched to strip Boris Johnson of his premiership and stop him taking Britain out of the EU without a deal. However, a lack of cohesion in opposition parties means neither plan is likely to succeed. Jeremy Corbyn said MPs should support his vote of no confidence and place him in power for a limited time in order to delay Brexit and hold a general election. The SNP has not ruled out supporting Corbyn, but Liberal Democrats leader Jo Swinson said Corbyn wasn’t the right figurehead for an emergency government. (Reuters)

What's next?

Markets await the next turn in the US-China trade dispute although the damage inflicted so far may be too much for a quick fix. Earlier this month, Donald Trump announced plans to implement tariffs on a further $300 billion worth of consumer goods. China’s immediate response was to allow the Yuan to depreciate past the key seven-per-Dollar level. Now, the world is waiting for China’s next move as the nation prepares retaliation against the new tariffs. Developments in the dispute this month have rattled financial systems, putting all major equity markets in the red while sending bond yields to all-time lows.

Trump’s already indicated that Xi’s government will need to come through with a compromise and that there’s a long way the US can go to inflict further pain on the world’s second-largest economy. This may be enough to deter the Chinese administration from retaliatory action, especially at a time when their collective heads are turned towards the worsening political situation in Hong Kong and weak July activity in both retail sales and industrial production. Despite this, China’s central bank is arguably better positioned to absorb the trade conflict for longer than the Federal Reserve with greater capacity for fiscal and monetary policy support.

Hopes of a trade deal anytime soon are long gone. Even though Trump delayed the new tariffs until December 2019 and has claimed he and Xi Jinping will talk ‘very soon’, investors are not very optimistic since a great deal of damage has already been done. The dispute has weighed on global supply chains and forced central banks around the world to ease monetary conditions, leading to a slash in forecasts by analysts and economists. While the announcement of a trade deal or any significant progress would certainly boost investor sentiment, it is unlikely to improve the immediate economic and geopolitical outlook. After all, we’re in a late cycle expansion, so the risk of an eventual recession will certainly remain.

Bottom line: Central banks are cutting interest rates as the US-China trade dispute continues to weigh on global growth, but the damage may be irreversible. Signs that a recession is near keeps popping up in financial markets, and question marks over the effectiveness of monetary easing are already in place. When the next downturn does occur, policymakers will most likely be forced into unchartered territory to stimulate the global economy.

GBP/USD

Yesterday, Sterling broke through the 1.21 resistance barrier against the Dollar for a sustained portion of the day following a strong beat in headline month-on-month Retail Sales. The Pound also found a bid tone due to rising anti-Johnson sentiment in the UK government. The Sterling trade-weighted Index has moved back to late July/early August levels, suggesting we’ve seen a bottoming-out of the currency.

GBP/EUR

Euro sentiment remained sour in yesterday’s trading session, which resulted in the Pound posting an intra-day gain of 1.0% against the single currency. This weakness was underscored by remarks from the European Central Bank’s Olli Rehn that the ECB should come up with an ‘impactful and significant’ stimulus package in September’s meeting.

EUR/USD

The Dollar Index has been trading relatively flat around the top of its range, signalling broad strength in the Greenback is likely to remain while global trade uncertainties are present. The currency pair’s failure to hold above the 1.12 level emphasises the bearish outlook. Sentiment from yesterday’s strong US Retail Sales may continue to drive the pair lower with little data to come today.

All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.