Trade uncertainty increases

Today's news headlines:

‘Tories wary of week full of potential electoral danger’ – As Donald Trump lands in London for a NATO summit this week, senior members of the Conservative party are worried that events beyond their control could derail their election campaign. Members of Johnson’s campaign will hope that Trump avoids a public endorsement of Johnson, as this could fuel the Labour argument that Johnson is in the US Presidents pocket. Despite being ahead in the polls, it’s set to be a big week for the Tories, with the final leaders’ television debate on Friday, where Jeremy Corbyn and Boris Johnson will go toe-to-toe. (Financial Times)
‘US manufacturing contraction worsens in November’ – Yesterday’s US ISM Manufacturing data disappointed markets as the sector contracted at a faster rate than expected. Weakness in new orders and exports puzzled economists who had predicted an improvement in conditions. Prolonged trade negotiations between the US and China have weighed on confidence in recent months and this latest release indicates that global trade issues are still the biggest threat to global growth. (Financial Times)

Unexpected hit

Donald Trump announced yesterday a resumption of tariffs on Brazilian and Argentinian Steel and Aluminium, causing some unease in the market just when it seemed tariffs were being reduced. The typical market reaction to increased obstacles to trade - which are likely to slow global growth - is an appreciation in the Dollar. Given that the Greenback is near the top of its range and the effect of these tariffs is hard to quantify, the effect was muted.

Later in the afternoon, US ISM Manufacturing Purchasing Manager Index came out worse than anticipated, continuing a trend of deterioration in that sector of the US economy. This is hardly news given the prolonged trade dispute uncertainty, but more surprisingly the Dollar sold off in a way that is rather uncharacteristic. One potential explanation might be that Fed Chairman Jerome Powell’s recent upbeat message was taken to presage an uplift in all the US sectors. Having failed to materialise in this data point, perhaps the Fed might be more disposed to loosen policy than the various Fed speaker statements had suggested. Given the stronger emphasis on data dependence – the Fed will react to data rather than forecasting outcomes – this view would seem to hold some water.

This morning, the President proposed tariffs on $2.4bn of French products in retaliation for the recent tax on digital revenue, which has disproportionately impacted US firms like Google, Amazon and Facebook. Again, this was somewhat expected given the rhetoric prior to the digital tax’s passage, but it does mean any potential rollback in Chinese tariffs is not the end of the story. It’s clear the administration favours this policy tool and is unlikely to change its approach based on some softer economic data. If the imposition of new tariffs results in further market weakness that is not checked by the Fed, you can expect the President to renew his attacks on Fed independence.

Bottom Line: Based on these new announcements, the prospect of a return to growth next year seems somewhat diminished as the China trade dispute is replaced by an EU trade dispute. Perhaps worse, a phase one deal is not a foregone conclusion so we could end up with a broader conflict instead of détente. Whatever prevails, an improvement in US manufacturing seems an uphill battle. The recent Dollar depreciation still seems peculiar; when all of this adds up to prolonged uncertainty, the classic formula has always been to pile into Dollar Assets. The recent change in this dynamic certainly piques our interest.

GBP/USD

Yesterday, the pair failed to indicate a bias in either direction as both the Sterling and Dollar trade weighted indexes declined throughout the day. A new opinion poll showed that the Conservatives lead over the Labour party had widened, which has supported Sterling into this morning’s session. Dollar weakness was exacerbated by comments from President Trump about potential metals tariffs on Brazil and Argentina along with uncertainty over US-China trade talks.

GBP/EUR

A gain in the Euro’s trade weighted index meant that the pair briefly dropped below the 1.17 handle overnight but has recovered back to the low 1.17’s interbank level this morning. On a yearly chart, the currency cross remains above all standard moving averages and continues in its upward trend channel, awaiting clarity on the UK’s political situation.

EUR/USD