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Truce or dare

​​​​​​Today's news headlines:

  • ‘Ursula von der Leyen survives tight vote to win EU top job'. The former German Defence Minister secured the European Commission President role by a narrow nine-vote margin, which means 327 MEP's voted against her and 22 abstained.  (Financial Times)
  • ‘Pound hits two-year low as City fears of no-deal Brexit intensify'. In a talkRADIO debate, both Jeremy Hunt and Boris Johnson stated that the current Irish backstop is unacceptable, increasing the risk of a no-deal Brexit. The Pound has reached two-year lows against the Dollar and all-time lows on the trade-weighted Bloomberg Pound Index. (Guardian)

The latest petard

One of the biggest downside risks to global economic growth could flare up again after an apparent truce at last month's G20 meeting. The ongoing US-China trade war has been characterised by tit-for-tat tariffs, which have significantly disrupted global supply chains. At last month's G20 meeting, Trump and Xi agreed to reconvene trade negotiations, a chance to produce a resolution to the disruptions. Unfortunately, Trump's Twitter addiction has gotten in the way once again. The President simultaneously made light of China's weak GDP growth figure, and threatened that the US could add more tariffs 'if we want'.

One of Trump's motives for the trade war is that China has been manipulating its currency to support its economy, but his attention has shifted to a new theme. China is by far the largest non-US holder of US government debt, and its holdings have been decreasing since 2018. The completely facile argument is that China is selling US Treasuries to undermine the US economy. Trump seems to be grasping at every straw to aggravate the Chinese, and this is a nuanced trade point that makes a very compelling argument on its surface.

Bottom line: The continuous decrease in Chinese holdings of US debt may spark fresh accusations from Trump, regardless of the argument's legitimacy. Continued trade tensions will only strengthen the case for US interest rate cuts, which is exactly what Trump wants.

Under the hood, the US economy’s doing just fine

Let's not beat about the bush; the Federal Reserve has signalled it will cut interest rates later this month due to slowing global growth. However, without downside global risks, it's questionable whether the Fed would need to consider such policy action at all. Domestic conditions just aren't that bad.

The flat reading in yesterday's industrial production could cause concern about the level of US output—especially when five of the last six releases have performed worse than the forecasts. The underlying details paint a better picture when you disregard a slowdown in the volatile utilities sector (it was a mild June!). Manufacturing output rose 0.4% in the month, spurred by impressive auto production figures that rose 2.9% vs 2.3% prior. Combined with the good Empire State Manufacturing Index released on Monday, the outlook for manufacturing is beginning to look decidedly brighter. Continued positivity will also hinge on President Trump's trade policies amid threats of a new round of tariffs against China.

Bottom line: Fed Chair Powell's confidence in the domestic economy has been underlined by good manufacturing numbers and robust Retail Sales data yesterday. These releases have had a positive effect on the Dollar Index, but have failed to alter the futures market's expectations of four rate cuts by year-end 2020.


The Greenback rallied rather strongly yesterday but seems contained at the 200-day moving average. In contrast, the Pound was sold due to increased political risks but appears to be holding steady into this morning's trading. There are a couple of prominent releases out today which could move the dial: UK inflation data and the US Beige Book overnight.


Both Sterling and the common currency were sold yesterday. The net effect was a continued nudge lower on the pair, through a key support level. A two year low is only 0.5% below the current level, and Sterling seems vulnerable to further selling throughout today.


Yesterday's Dollar gains occurred opposite Euro losses nudging the pair to trading range lows. The Dollar continues to drive this pair based on safe-haven appeal.