One of the biggest threats to global economic growth is arguably closer to a resolution than it’s ever been, and the optimism is clearly shown in today’s asset prices. In recent weeks, both the US and China have brought calm to markets as both nations seek an amicable solution to the economically damaging trade war that has snowballed this year.
Yesterday, the Financial Times reported that President Trump’s administration is debating whether to remove tariffs on certain Chinese goods, thereby satisfying one of China’s key trade conditions. Earlier today, Chinese President Xi Jinping spoke at China’s International Import Expo, stating: ‘China will give greater importance to imports. We will continue to lower tariffs and institutional transaction costs’. Despite the pattern of consistent disappointment whenever a trade deal seems close, the pricing of assets suggests that this time is different. Over the past month, both the S&P 500 and European Stoxx 50 have rallied on hopes of a partial trade resolution. As of Tuesday morning, the S&P 500 was up 4% and the European Stoxx 50 up 6%, while the Chinese Yuan traded below the key 7 level against the US Dollar for the first time in three months. All that has occurred ahead of the anticipated ‘Phase One’ meeting is rhetoric and trade demands, yet markets are behaving like a deal is already sealed. This could place investors in a vulnerable position, considering the volatile nature of previous talks.
Bottom line: If recent history can teach us anything, it’s that an inflated appetite for risk due to trade war optimism is fragile and can easily be reversed. But perhaps the world’s two largest economies have suffered enough damage to their manufacturing sectors and will find a solution this time round.
Sterling drifted lower throughout yesterday’s European session due to election-related uncertainty, dropping below the 1.29 handle against the Greenback. Weak UK construction PMI data justified the move lower for Sterling’s trade-weighted Index as markets remain uncertain about the UK’s economic outlook while the Brexit malaise continues.
After a short rally around yesterday’s European open, Sterling slipped back towards a familiar range for the rest of the trading day. A combination of decent EU final manufacturing PMI figures combined with weaker UK construction stats kept the pair depressed below the 1.16 level. UK services data will be eyed later.
With the aforementioned trade talks between the US and China progressing nicely, markets are justifiably more biased towards Dollar buyers. The EUR/USD pair moved lower in yesterday’s session and overnight but has kept the 100-day moving average afloat, meaning longer-term downside could be limited. US ISM Non-Manufacturing PMI data will be released this afternoon while there is little European data due out today.