Risk off dominates as trade war fears grow
Trump’s decision to slap a 25% tariff on steel imports and 10% on aluminium, to counter Chinese practices spooked the markets overnight, successfully bringing treasury yields, the dollar and US indices tumbling lower and boosting the yen as risk off dominates. The knock-on effect pulled Asian markets lower and the FTSE can be expected to be hit hard on the open, given its heavyweight mining sector.
Under the pretext of national security, Trump has announced tariffs on steel and aluminium imports. However, it still remains unclear whether this will be applied to imports from all countries or just some. Whilst one of Trump’s aims is to encourage China to reform its practises, the reality is that Canada and Brazil are bigger exporters to the US than China.
Whilst market eyes have been firmly on interest rate expectations and recent volatility, no one was preparing for a potential trade war. The broader market sold off as these tariffs are creating and uncertain environment trade wise and the market hates any interventionist policy from governments. Whilst US steelmakers and aluminium makers rallied hard following the announcement, the Dow closed 430 points lower, whilst the S&P 500 and the Nasdaq closed 1.6% and 1.7% respectively.
The risk off sentiment was clear as USD/JPY dropped almost 0.5% lower closing the session at a two week low. The sell off is continuing in the Asian session with investors targeting 106.00 in the near term before potentially opening the doors to 105.5.
Fed's Powell tones down hawkishness as no signs of US economy overheating
Earlier in the session, the US equity markets had passed through Fed Chair Jay Powell’s second, more dovish, appearance on Capitol Hill in a relatively unscathed manner; aided by Powell’s apparent toning down of Tuesday hawkish optimism, by confirming that the US economy was not overheating and that there was still slack in the labour market. His adjusted tone caught some by surprise, especially in light of the better than expected economic data released through the US session. US equities even managed to hit session highs during his appearance before easing lower.
The dollar traded around break even during the course of Powell’s appearance, highlighting the impact of the change of tone, compared to the dollar’s rally on Tuesday.
Will UK Construction PMI pull house builders lower?
UK Construction PMI will ensure House builders are under the spotlight in today’s session. Construction activity is expected to have picked up slightly to 50.5 in February, up from the disappointing print of 50.2 in the previous month; a month which saw construction activity almost come to a halt. Any further slowdown in the sector could lead to a contraction in construction activity and with Brexit uncertainties, the main reason for the slowdown in the sector, showing no signs of clearing soon, this may happen sooner rather than later.
Theresa May’s post-Brexit Vision
Brexit has dominated the headlines for much of the week and today is no different. Market participants are waiting eagerly for Prime Minister Theresa May to lay out her vision for the post Brexit EU- UK relationship.
Just a week ago expectations were rather different, with markets hoping to receive clarity from May to helping the Brexit process move forwards. However, in light of her flat out rejection of the draft Article 50 treaty, there is a growing fear that this landmark speech could drive a larger wedge between the two sides, pushing any possibility of a deal being reached further into the distance.
Should hopes be dashed of a deal being reached GBP/USD could dive towards $1.36. Meanwhile, any signs of a close alignment to the EU could boost the pound back towards $1.39. GBP/USD could find itself well supported should the dollar continue to sell off in response to Trump’s tariffs.
Opening calls
FTSE to open 44 points lower at 7131
DAX to open 114 points lower at 12,076
CAC to open 37 points lower at 5225