It was a tale of contrasting fortunes for stock markets last month with US markets seeing their best August performance in 4 years, over optimism that some form of renewed NAFTA deal would be tied up fairly soon between the US, and Mexico where a deal has already reported to have been reached, and more latterly Canada where there was optimism a deal would be finalised in the coming days.
The optimism about a Canada deal may well be misplaced given reported private comments from the US President that appear to suggest he’s only interested in a deal on his terms, or no deal at all. Further disparaging comments about Canada from President Trump on Twitter over the weekend don’t bode well in terms of progress in this week’s upcoming negotiations, however we’ll have to wait until tomorrow for a US stock market reaction, given US markets are closed for Labour Day.
If it turns out to be true that President Trump doesn’t even want a deal then last week’s optimism could well soon give way to the pessimism that has seen European stocks experience rather contrasting fortunes last month, where we saw the FTSE100 fall to a four-month low, while European stocks also finished the week and month lower as well.
This was over concerns that the trade dispute that appeared to be on hold after President Trump’s meeting with EU Commission President Juncker a few weeks ago, got reignited after comments from the US President that compared the EU’s trading policies to be as bad as China’s, but on a smaller scale, after dismissing an EU proposal to scrap all tariffs on all motor vehicles as insufficient.
As we head into a new week and month, it these concerns that will remain front and centre of investors’ minds, along with increasing concerns about stability in emerging markets, after the sharp declines seen in Argentina and Turkey’s currency last week.
The lira will once again be in focus today with the latest headline CPI inflation numbers which last month came in at 15.85%. Today’s numbers could well be considerably higher given the recent sharp declines in the currency on the last month or so, with estimates in the region of a rise to 17.5%. This would put further pressure on Turkish authorities to raise rates, something that President Erdogan has thus far resisted.
On the data front investors will be looking for evidence as to whether the trade concerns which have been simmering away for the last few months are starting to trickle down into the economic data.
Early suggestions would appear to support a prognosis that they have been and today’s latest manufacturing PMI’s for August would well reinforce that perception after the latest data from China showed that the Caixin Chinese manufacturing PMI data softened further in August to 50.6 from 50.8, a 14 month low.
Last week’s flash PMI’s from France and Germany would appear to suggest that we’ve seen a bit of a pickup in August to 53.7 and 56.1 respectively, however Spain and Italy remain another matter. These are expected to show a modest softening to 52.5 and 51.2 respectively, with concerns about the new Italian government being reflected in a recent rise in Italian bond yields.
The UK economy is also expected to remain front and centre as the Brexit background music continues to play in the background, as our so-called esteemed politicians all return to Westminster this week after their summer break, with both government and opposition riven by internal splits on Brexit as well as other unsavoury matters.
On the data front we’ll get a decent snapshot of the UK economy in August starting today with the latest manufacturing PMI number which is expected to come in at 53.9, down slightly from the 54 in July, another fairly resilient number.
The pound has slipped back once again after EU chief negotiator Michel Barnier said he strongly opposed some parts of Prime Minister Theresa May’s Brexit plan. This is to be expected as we head into what could be the final furlong of Brexit negotiations over the next two months as both sides push their own version of the narrative. In any case, Michel Barnier is the least of the Prime Ministers problems given that so many in her party oppose the so called Chequers plan, which means she’ll struggle to get it through the Commons anyway.
EURUSD – the 1.1750 level once again proved to be a significant barrier to further gains last week, as the euro drifted back from levels that have capped since early July. This failure could well see a move back towards the 1.1500 area, now that we’ve slipped below the 1.1620 area.
GBPUSD – the recent rebound ran into resistance at the 50-day MA at 1.3045 last week. A move through 1.3070 is needed to reopen a move towards 1.3175. Below 1.2930 reopens a move back to the 1.2850 level.
EURGBP – having hit a one-year peak last week, just shy of 0.9100, we’ve seen a sharp pullback with a key reversal day and a key reversal week, which suggests the potential for further losses towards 0.8920 and the July lows at 0.8860/70.
USDJPY – fell just shy of the 112.00 area last week keeping the US dollar in a range. A move lower has support at the 110.60 cloud support area. The major support sits back on the 200-day MA at 109.80.
FTSE100 is expected to open unchanged at 7,432
DAX is expected to open 30 points lower at 12,334
CAC40 is expected to open unchanged at 5,406
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