Another day, another market moving comment from Trump. Wall Street fell for a third straight session overnight and Asian markets took another step lower after Trump portioned blame on China for a deal not being done. “China broke the deal”. These comments clearly don’t bode well for the trade talks which are due to start today. They come just hours after Trump tweeted an optimistic message over a deal being achieved.
We would assign a 75% probability of Trump raising the trade tariffs on Chinese goods to 25%. Purely from a negotiating standpoint, to threaten the higher tariffs then back off a week later would look weak. By making the threat Trump presumably feels the higher tariffs are necessary for China to reconsider the recent back peddling. The markets are nervous of the impact that these actions will have on the health of the global economy, just as it is showing tentative signs of stabilising following a period of slower growth.
Yen appreciates on risk off sentiment
Risk aversion continues to grip the market. Riskier assets such as equities are out of favour, whilst flows into the safe haven yen have pushed the currency towards a six-week high versus the dollar. USDJPY dropped to 109.70 overnight, its lowest level since March 25th. The Aussie dollar, which is considered a proxy for the Chinese economy hit a four-month low versus the yen of 76.55 and has dropped 1.8% against the yen so far this week.
Movement in the stock markets continues to be primarily headline driven as investors look towards the start of the latest round of trade negotiations in Washington today. We expect this risk on, risk off headline driven trading to persist for the rest of the week and for as long as trade related news continues to bounce back and forth.
Any indication that Chinese negotiators can convince President Trump to back down on the tariff hike threat, will lift stocks. On the other hand, should Trump go ahead with the tariff increase we could expect equities to continue falling. Investors will need to price in the trade dispute as a much longer-term factor.
Pound steady at $1.30 as PM promises another Brexit vote
After three straight losing sessions, the pound was holding steady a touch above $1.30. Pressure has been mounting on Theresa May to quit as the UK looks set to participate in the EU Parliamentary elections. In a bid to calm those attempting to oust her, Theresa May has said that she will hold a 4th Brexit vote within the next two weeks. With no accord between Theresa May and Labour in the cross party talks, its is unlikely that the PM will get the numbers that she needs to push the Brexit deal through Parliament. We expect the pound to continue with a negative bias as Theresa May clings to power by a thread.
Opening calls
FTSE to open 31 points lower at 7240
DAX to open 33 points lower at 12146
CAC to open 24 point lower at 5393
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