Risk remains firmly on the table despite the breakdown of US – Chinese trade talks
Wall Street ended the previous week on a positive footing, lifted by a better than expected US jobs report; 223k jobs created in May vs. expectations of 200k, unemployment unexpectedly fell to an 18 year low of 3.8% and wages managed to creep up to 2.7%, better than the 2.6% forecast and a 4-month high. The solid jobs report overshadowed any trade war concerns which had been brewing and lifted the S&P over 1%.
Asian equities have started the new week in demand, with European and US futures also pointing to a stronger start. Markets remain surprisingly sanguine despite trade war fears ramping up. Trade tariffs had already been confirmed against the EU, Mexico and Canada prior to the weekend.
The third round of US – Chinese trade talks breaking down over the weekend indicate that a $100 billion trade war between the two powers could begin as soon as this month. Yet the markets are reacting with the same indifference with which they responded to the tariffs being levied on the US’s closest allies last week, in a sign that traders are becoming increasingly accustomed to Trump’s heavy-handed negotiating tactics.
Continued flows out of safe havens
There remains a certain level of optimism that this aggressive posture from Trump is a positioning that will quickly blow over, rather than result in the actual application of US tariffs and the application of threatened retaliatory measures from the targeted countries. Proving the point traditional safe haven gold remains firmly below $1300, whilst the Japanese yen was also 0.1% lower versus the dollar.
With a slow down in high impacting economic data this week, trade developments are expected to remain a central topic for traders. Signs of the latest threats being more serious than a negotiating tactic could see traders take risk off the table quickly; however, until then continued trader indifference could be on the cards.
UK Construction PMI
Whilst US index futures remain upbeat, the dollar is showing some signs of strain, dropping 0.1% overnight. The softer dollar is helping the pound claw back lost ground as it pulls $1.34 into sight. Pound traders looking towards the construction PMI this morning, may be disappointed. The rebound in April following a particularly weak March is set to ease in May, with the PMI easing back to 52 from 52.5. A softer than forecast reading could see the pound aim back down towards $1.33 and pull house builder stocks lower.
Opening calls
FTSE to open 20 points higher at 7721
DAX to open 41 points higher at 12765
CAC to open 21 points higher at 5484