Summary
The dark mood over global markets returns, on increasing pessimism that a full-blown U.S.-China trade war may be unavoidable.
Ban on China’s U.S. tech buy-ins bites
The latest White House trade restriction against China might be an unprecedented ban of firms, at least 25% Chinese-owned, from investing in 'industrially significant' U.S. technology companies.
If the Treasury proposals, outlines of which were reported by the Wall Street Journal, are enacted, Beijing would have little choice but to react in kind. That could mean potential clampdowns on U.S. technology firms active in China, from the smallest to the largest. The latter group comprises web-based giants whose shares have underpinned U.S. stock markets for the last two years, including Apple (NASDAQ:AAPL), which derived 8% of revenues in the country in the second quarter after a recent return to quarterly growth there.
Nasdaq negative
Nasdaq Futures are some 40 points lower, pointing to the kind of definitive drop when Wall Street opens that the tech-heavy gauge has largely avoided, even as U.S trade relations progressively worsened. Futures contracts for Dow and S&P 500 indices and, FTSE, DAX and STOXX gauges are just as heavy.
Sentiment on major Asia-Pacific indices was, numerically at least, slightly worst. The People’s Bank of China’s has gone ahead with the 50 basis-point reserve ratio requirement cut flagged last week, amounting to a $108bn liquidity release, higher than widely expected. The decision by PBoC to make more liquidity available for potential lending to smaller firms than expected shows policymakers are going into damage limitation mode, after China’s stock markets saw their worst week since February.
Dollar drive disrupted again
In line with the pattern of the last few months, risk aversion is limiting any dollar advances from the perceived inflationary input of tighter trade restrictions. The yen is already set for another large safe-haven-seeking rise that could easily match two surges last week taking, the USD/JPY pair back to the edge of two-week lows near 109.20.
The dollar’s drop against the yen accounts for almost all of the strength in the Dollar Index, which ekes out a 100-tick or so gain, keeping the gauge slightly up from 6-day lows. This also underscores that the currency markets see U.S./EU and UK yield differentials as likely to remain intact in the medium term, despite benchmark Treasury prices reversing to the upside just like bunds and gilts, on further safety-seeking.
Both the euro and sterling are over their late-last-week revivals, having retreated before having to take on well-known resistance levels.
Ifo struggles to lift Europe sentiment
There’s a slim possibility that Germany’s monthly Ifo business climate indices could have a similar effect as PMI data on Friday and take the edge off negative sentiment in European markets. The institute’s Business Climate index was a tenth of a point better than forecast at 101.8, though the Current Conditions gauge was 5 basis points below an expected 105.6.
With the weak euro providing little succour for large equities so far, the hurdle for a sustained swing higher on Monday looks a tough one. Furthermore, investors are focused on the main event for this week, the EU Summit beginning on Thursday.
Migration will be the key talking point for Germany, and other large continental members, though Brexit will loom large in the minds of all. After Sunday’s mini migration summit failed to produce much impressive consensus, member states are heading into meetings under a cloud created by a growing political crisis in Germany with asylum policy at its heart. Breakthroughs on that and Brexit look like a big ask. There may well be even less cheer for investors to buy come Friday.
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