A week that had started positively from a risk perspective has now taken an about-turn as the next level of US/China trade wars escalates. US President Donald Trump has announced his intention of levying a 10% tariff on $200bln of Chinese goods. This had been an expected next step but for some it has probably come about a little faster than expected and while these tariffs are unlikely to be actually implemented for several months, they are a concerning development. China themselves have yet to come back with any tit for tat response but they have said they will be making a complaint to the WTO deeming the US’s tactics as unfair and bullying. Overnight we saw Asian bourses trade lower with US futures also following suit. The Nikkei closed down 1.2% while the Hang Seng was down 1.59% and the ASX/S&P down .68%. A sea of red greeted us from Europe this morning with the DAX already down over 1%, closely followed by the FTSE, CAC and broader EuroStoxx index. US futures are all now pointing lower as well. Trump certainly has plenty on his plate, later he’ll meet with NATO leaders, Trump has already been heavily critical of Americans supposed allies ahead of today’s meeting and it’s unlikely he’ll be met with a warm reception.
We are not just looking at the US/China trade wars as cause for concern. Closer to home and yesterday’s release of the German ZEW was exceptionally downbeat. The euro bore the brunt of the selling in yesterday’s trade as a result. The economic sentiment survey was at -18.7 down from 12.6 and the expectations survey -24.7 down from -16.1, as the German economy shows signs of levelling out. This makes things interesting for the broader Eurozone and ECB and we’ll be keeping a close eye out for several ECB comments later today. Draghi, Praet and Mersch all cross the wires through this morning at a session in Frankfurt and if they mention a cautious approach then euro downside is likely.
GBP recovered somewhat yesterday and it’s likely the avoidance of a leadership challenge rather than data that helped the pound. May has survived for now but as we mentioned yesterday we are unlikely to have heard the last of this so do not get complacent. Data wise the figures from the UK weren’t great either. Industrial and manufacturing production were both considerably weaker than expected with industrial production contracting. The ONS will be releasing a monthly GDP estimate, they did this for the first time yesterday and it was as expected at .3%. There’s not much in the way of data for the rest of the week from the UK but Mark Carney is scheduled to speak later today in Boston so any chat about monetary policy will be pounced on by markets. The risk for GBP is that markets are currently pricing in a rate hike for August (>60% probability), perhaps World Cup fever will help lift data even higher from Q2 but it’s still hard to fathom a rate hike in an environment as fragile as the UK, especially with GDP growth still lagging well behind its peers.
EURUSD looking at support towards 1.1700 area, (1.1689 was yesterday’s low), overnight 1.1740 has help any bounce higher but 1.1760 and 1.1790/1.1800 above that are where the real sellers of EURUSD are waiting.
EURGBP range bound currently between .8820 and .8900 and there’s no real bias as long as we stay in that range.
GBPUSD no much change out of yesterday’s outlook, 1.3363 high is resistance for now with 1.3200 area offering support.