The war of words between the US and China continues as tit for tat threats on tariffs shake market confidence. The result is that global markets ebb and flow on every word, the threat of additional tariffs results in global selling across equities, while safe havens find themselves in demand with gold taking the commodity stakes while JPY wins in the currency markets. Then as trade concerns ease and the aggressive language subsides we see the inevitable resurgence of risk appetite, stocks bounce back and all is right with the world again…..until it’s not.
We have to bear in mind that markets often position themselves to the extreme case for most scenarios, then find a balance when the facts are actually confirmed. In the case of trade wars and tariffs, much of it is threats and positioning, both sides looking for their negotiating point. At one stage yesterday, global stocks were down over 2% following news that China would impose 25% tariffs on €50bln of US imports, a direct retaliation to Trump’s threats (a plan that would not come into action until May unless he gets what he wants = threat in my book). However, as has often been the way, the US struck a conciliatory note saying the door is open for negotiations. The S&P is up over 4% from yesterday’s lows, the German DAX is up over 3%, the UK’s FTSE up over 2% while overnight saw the Nikkei up over 1.5% in that session alone.
Outside of that major sideshow, normal market activity was focused on the fundamental data. GBP took an early hit as construction CPI confirmed what everyone living in the UK could see with their own eyes that construction has been slowing. Yesterday’s print of 47.0 was well below the 51.4 expected and shows the industry is contracting, at a rather alarming rate. The initial reaction in GBP was muted, however GBPUSD started to drop and was down over .5% before bouncing off support which sits at 1.4010 (the low was 1.4015). Likewise EURGBP rallied on the weaker pound, trading up to .8759, falling short of stronger resistance up at .8780/90 area.
Services PMI for the UK crosses the wires this morning and will be a risky point for GBP. The services industry account for over 80% of the UK’s GDP and is expected to have slowed to 54.0 from 54.5, while the composite reading is set to slow to 53.9 from 54.5. A weaker reading will almost certainly see sterling under additional selling pressures, markets are pricing in a high probability (71%) of a rate hike on May 10th. This seems exceptionally high given the uncertain trajectory of the UK economy and obviously the risk Brexit still poses. EURGBP range currently holding at .8710 up .8780/90 area. A drop below .8710 support will favour a move back to lows towards .8670. However a weaker PMI and EURGBP should find itself back up and testing resistance below .8800.
The euro finds itself under some early pressure this morning. Weaker than expected German and Eurozone composite and services PMI readings impacting demand. The slower growth in these areas knocking the euro and driving some selling. When we see this data I immediately look to reference the ECB’s latest comments. I’ve been skeptical of market positioning on euro and feel markets are ahead of themselves pricing an exit to easing, the ECB confirmed the importance of their ultra-easing program in getting the Eurozone economy to where it is and it will not be able to continue this trajectory should the ECB remove the drip. This leaves downside open for the single currency and EURUSD is looking heavy. The 100 day moving average (EMA) has held any dips since December and if we look back further we’ve hardly seen a sustained break below this indicator for since April 2017. Last October we saw about a month below that level but should we see a break of 1.2220 then the drop could really accelerate. This would also break below the uptrend in place since April 2017, and this would represent a huge technical break. 1.2000 would attract very quickly.
We’re light on US data this morning, some Fed speakers are likely the main point. Yesterday’s ADP employment report was stronger than expected at 241k, however slightly weaker services data halted the USD advance. That being said the greenback has started higher again this morning and should the USD index break above .9070 then we may have a confirmed bottom in place for the USD. Tomorrow’s NFP will be the headline data from the US, 185k is the expected figure but the headline figure will likely only stir algos on release, traders will be looking for wage growth for real sustainable USD strength and for that a reading of 2.7% or better will be required.