Markets flat as China quickly responds to tariffs

Ball back in Trump’s court as China responds with counter-tariffs

Markets are taking new tariffs between the US and China in their stride again on Wednesday, with stocks in Europe and futures in the US looking quite flat ahead of the open on Wall Street.

The latest tit-for-tat between Washington and Beijing has been on the cards for some time and while investors would have preferred to avoid the need for them, they were prepared and it was well priced in. In fact, the US tariffs were probably towards the lower end of expectations so the announcement didn’t really carry the same shock factor that previous announcements or reports have.

What may have a greater impact is Donald Trump following through quickly on phase three, as he has indicated he would which would dramatically ramp up the intensity and pace of the trade war between the two countries and could lead to more undesirable outcomes. There is clearly a good reason why the Trump administration has chosen not to include certain products – specifically those it stripped out after the consultation period – and opted initially for 10% rather than 25% and I think this may stop him acting in the rash manner he indicated he would.

OANDA Trading Asia market closing note : Irrational exuberance ? YUAN

UK inflation spikes in August sending sterling higher

Over in the UK, attention has switched briefly away from politics – or more specifically Brexit – and onto the data after CPI numbers for August showed prices rising by 2.7%, a significant beat on expectations. The release triggered quite a strong response in the pound, rallying above 1.32 against the dollar for the first time in almost two months before settling up around a quarter of a percent on the day.

UK Inflation

I don’t personally think this changes much from an interest rates perspective, especially in the near-term with the Bank of England having only recently raised interest rates to post-financial crisis highs and shown a willingness to proceed with caution over the coming years. We’re also heading into a crucial period for Brexit talks and I think policy makers will want to withdraw from the spotlight during that time and then reassess the situation once the terms of the divorce are clearer.

Tariffs? – So what!

GBP to remain sensitive to Brexit ahead of Salzburg summit

The increase itself may also be temporary and reflect firms taking advantage of a great summer and enthusiastic consumer, something that may take its toll in the months ahead. I don’t expect the BoE to react too much to this summer spike and instead take a more conservative view unless we see further evidence of it becoming a longer-term trend.

GBPUSD Daily Chart

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Sterling is going to remain sensitive to Brexit reports in the coming months and tomorrow’s meeting in Salzburg will be the next hurdle. Traders will be paying very close attention to any comments coming from the summit and will be looking for any hints that significant progress is being made towards a deal that will avoid a disastrous no deal Brexit. Traders are clearly becoming more optimistic but that’s coming from a low base, with a lot of pessimism having been priced in since April.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 31)

OANDA Senior Market Analysts Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Turkey rates rocket, Sterling up on Brexit hopes, Carney house price warning, Beijing welcomes trade talks offer.

Prospect of Sino-US talks lifts markets

China open to US invitation for trade talks

It’s been a more positive start to trading on Friday, with talks of new Sino-US trade talks potentially helping to lift risk appetite among investors.

Stocks in Asia ended the week on a high, with major indices recording gains of around 1% and those in Europe up by a slightly more modest 0.3% or so. US futures are roughly tracking those gains in Europe which potentially highlights the increased risk of a trade war for Asian markets compared to Europe and the US at the moment. Still, with Trump also apparently preparing to announce the next $200 billion of tariffs on China, who are responding with closer ties with US foe Russia, we are clearly not currently close to a resolution.

The US economy has been gathering positive momentum despite the risk of a trade war and today’s retail sales data is expected to provide further evidence of that, with spending expected to have risen by 0.4% last month. This would continue the steady trend of rising sales over the course of the year as consumers spend the additional income that tax cuts afforded them thanks to last year’s reforms.

DAX gains ground as investors upbeat after ECB meeting

Carney appears in Dublin after fresh Brexit warning

Mark Carney is due to speak in Dublin this morning which is sure to attract some attention, coming a day after the Bank of England kept interest rates on hold and, arguably more interestingly, the Governor risk the wrath of Brexiteers with more gloomy predictions. Carney met with the cabinet on Thursday and laid out what the bank considers to be a worst case no deal Brexit scenario, which included house prices falling by 35%, something Brexiteers will be keen to stress is more project fear from a closet remainer.

I think there’s a good chance that Carney steers clear of Brexit forecasts when possible in the coming months for fear of being seen as interfering in the process. The central bank may also be planning a similar approach after raising interest rates last month and giving itself the freedom to take a step back now for the rest of the year.

Dollar marks time as China data neutral

Lira steadies after CBRT hike but significant risks remain

The actions by the CBRT on Thursday appears to have had the desired effect for now, with the lira having since stabilized at around six to the dollar, which is still extremely high compared to earlier in the year but around 15% off its peak a month ago. While inflation is still expected to continue to rise from around 18% currently and the economy could face a tough recession, the moves by the central bank may prevent a much greater crisis.

USDTRY Daily Chart

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The question now is whether President Recep Tayyip Erdogan will be willing to accept the central bank going against his wishes and raising interest rates, or whether he’s going to seek to control the central bank as well which could have devastating effects. We may have some stability in the near-term, which is welcome, but I have little confidence that this will last and feel a lot more needs to be done to reassure investors.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

BoE leaves rates unchanged amid more Brexit uncertainty

The Bank of England kept interest rates on hold on Thursday and highlighted greater financial market concerns about Brexit, a month after raising borrowing costs for only the second time in more than a decade.

The BoE said its nine rate-setters voted unanimously to hold rates at 0.75 percent, in line with economists’ expectations in a Reuters poll, and said there had been limited domestic developments since its Aug. 2 meeting, other than on Brexit.

“Since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the (European Union) withdrawal process,” the central bank said.

Reuters

CBRT takes the focus off BoE and ECB meetings

Turkish central bank needs aggressive hike to settle investors

Markets are trading relatively flat ahead of a slew of central bank meetings on Thursday, with the BoE, ECB and CBRT all scheduled to make interest rate decisions.

While the Bank of England and European Central Bank would typically steal the spotlight, it’s actually the Central Bank of the Republic of Turkey that will likely steal the headlines today. With inflation in Turkey close to 18% and the currency having repeatedly fallen to all-time lows against the dollar, it’s become quite clear to all that the central bank needs to step in with a substantial hike and its unexpected pledge last week that its monetary stance will be adjusted, suggests it will do just that.

This would be quite controversial though with President Recep Tayyip Erdogan having been very clear about his opposition to higher rates. Having made his desire for control clear, investors will be monitoring today’s decision very closely to see just how independent the central bank really is. A rate hike looks obvious but how aggressive they’ll be will give a strong indication of how much influence Erdogan has over them.

USDTRY Daily Chart

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Traders will be very quick to express their disapproval if the central bank is seen to be not responding aggressively enough which could result in a substantial decline in the Turkish lira. There is currently an expectation of a more than 4% increase in interest rates and it may take more to satisfy investors and avoid such a depreciation. Anything short of this could be bad news for the lira both in the near and long-term.

BoE unlikely to change message as Brexit negotiations enter crucial stage

The ECB and BoE decisions will likely be relative non-events compared to the CBRT. Both central banks have recently announced some monetary tightening – BoE raising interest rates and ECB tapering QE and announcing its end date – and are in no rush to speed the process up.

With Brexit negotiations heating up, the BoE will more than happy to drift into the background having come under fire for its views in the past. With the outlook so uncertain and hanging on the outcome of these negotiations, there’s little upside to the central bank making any changes to its policy message between now and the end of the year and I expect that to come across over the next few meetings.

ECB expected to maintain slight tightening plans

While the ECB may be less affected by the Brexit negotiations, it has set out a path for the next year that will see it slowly exit its easing program and with the economy experiencing a slight slowdown, it’s going to be in no rush to change course in the near-term. The first rate hike may be a little more delayed than it previously alluded to but I don’t expect it to hint at that until QE has ended.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Will we get fireworks from BoE and ECB?

What to expect from a not-so-super Thursday

Thursday has the potential to be another interesting day in the markets, with interest rate decisions due from both the Bank of England and the European Central Bank.

It’s not often that we hear from two major central banks on the same day, let alone around the same time, but when we do there’s always the potential for some turbulence.

Both central banks are in the early days of their respective tightening cycles, with the BoE having recently raised interest rates above 0.5% for the first time since the financial crisis and the ECB drawing its quantitative easing program to a close at the end of this year.

While there’ll still be plenty of cash sloshing around the financial system until they start the process of reducing their balance sheets – as the Federal Reserve is currently experimenting with – the moves being undertaken represent a very cautious and gradual tightening that traders are monitoring very closely for any signs that they may lose their nerve.

This is particularly true in the current environment with the UK and EU locked in Brexit negotiations as the 31 March deadline draws ever near. Protectionism is another key risk factor with US President Donald Trump threatening tariffs on the block. Add to that the struggles being experienced in emerging markets at the moment – a major trade partner of Europe – and the jobs of the central banks become that much harder.

We already appear to be seeing a slowdown in numerous economies across Europe due to a combination of these factors, something the central banks don’t appear to concerned about just yet but may do should they persist.

USD/JPY – Japanese yen gains ground

What should I be looking at?

The obvious chart is EURGBP given that these are the two currencies most sensitive to what the BoE and ECB do. The closely linked nature of the two economies can mean we see less powerful swings in this pair though than we do certain others which can make it more or less appealing, depending on preferences.

EURGBP Daily Chart

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The euro has definitely had the better of things throughout the summer, with no deal Brexit being viewed as a far greater risk for the UK than the eurozone, which is understandable. What this means though is that if the two sides do start to find common ground, we may see this trend reverse course, as we have over the last couple of weeks when we’ve had some more positive news flow.

That trend may already have changed, with last week’s sell-off taking us below the rising trend line and potentially signalling a shift in sentiment in the market. Obviously that won’t change the outcome of the meetings, or press conference in the case of the ECB, but it does give a sense of bias heading into it.

Sterling Pauses on Reports of Leadership Challenge

Both currencies have found some form against the US dollar over the last month following a rough summer but are yet to see the spark that gives some confidence that they’ve broken into a more sustainable uptrend. They’ll definitely be ones to watch heading into the meetings.

EURUSD Daily Chart

GBPUSD Daily Chart

What can we expect from the meetings?

My expectations are actually quite low for the meetings. The reason why is that it seems to suit both central banks to stay under the radar for now. Both have made important first steps towards normalization and are in no rush and with Brexit on the horizon, now is not a good time to be changing course, especially as they don’t have to.

Both have laid out quite clear plans for the next year and even if they don’t stick to them – which there’s a good chance they don’t given the amount of unknowns and risks – the important thing is that investors are largely on board and the economies are doing ok. I don’t think they’ll want to mess with that.

So I don’t expect any changes in interest rates or QE this month and we can probably expect ECB President Mario Draghi’s press conference to be a rather dull affair.

Famous last words eh….

Sterling Pauses on Reports of Leadership Challenge

China using Russia to get at the US as trade tensions rise

US futures are trading relatively unchanged ahead of the open on Wednesday, taking the lead from Europe where markets have been quite calm early in the day.

It’s been an uneventful day in financial markets so far, with only low level data being released and no major political stories causing a stir. This is likely to just be a temporary lull as tempers continue to flare between the US and China, with the latter using its relationship with Russia to send a message that there’s more than one way to win a trade war.

With China involving the WTO in the dispute and the US preparing more tariffs – and threatening an eventual tariff on all imports – it doesn’t appear this threat is going away any time soon and is something we should just get used to. This could work to the advantage of the EU with Trump engaging in negotiations in an attempt to forge closer trade ties, remove barriers and eliminate the apparent need for new tariffs.

Asia risk continues to wobble (OANDA Trading Podcast 938Now)

Threat of leadership challenge weighing on sterling

The constant flow of Brexit speculation and reports are continuing to find their way into the media, something that is unlikely to change as we get ever closer to the deadline with a deal. Over the last couple of weeks that’s resulted in a lot of volatility for the pound with traders getting very excited at the release of anything that indicates a move away from the no deal scenario.

GBPUSD Daily Chart

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While I’m sure the pound would have plenty further to fall in the event of a no deal Brexit, a large amount of pessimism has been priced in now which may explain why we see such significant surges in response to relatively insignificant reports. Still, that is the current reality and it’s likely to see the pound remain in its volatile state for some time.

Working against these more optimistic stories has been reports of a leadership challenge with some of the more vocal Brexiteers in Theresa May’s own apparently plodding against her, dissatisfied with the direction negotiations are headed in. The threat of this has prevented the pound making further gains in recent days as its seen as increasing the chances of no deal Brexit or at least a harder one.

EUR/USD – Euro slightly lower as eurozone industrial production misses mark

BoE tomorrow likely to be uneventful

With the Bank of England decision to come tomorrow, the pound is not likely to be steady for long. The central bank isn’t expected to announce any changes tomorrow and will probably prefer to drift into the background as much as possible for the remainder of the year until a deal is reached but that won’t stop traders picking apart the minutes and looking for clues on the timing of the next rate hike.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Carney extends his stay at BoE to 2020

The current Bank of England Governor Mark Carney has agreed to stay in his current role until the end of January 2020.

“The extension was agreed in an exchange of letters between the Governor and the Chancellor (U.K. finance minister) published this morning,” the government said in a statement Tuesday. The governor had been due to step down at the end of June 2019 — just two months after the March 29 deadline for the U.K.’s departure from the European Union.

In his letter to Finance Minister Philip Hammond, Carney appreciated the support from the prime minister and expressed his willingness to do whatever it takes to facilitate a smooth Brexit.

CNBC

GBP struggling for momentum despite strong data

Sterling plunges after initial post-data gains

The start of the European session has been dominated by data releases from the UK and euro area, with investors also keeping a close eye on trade developments involving the US, not to mention Brexit.

It’s been another volatile day for the British pound, which rose in the immediate aftermath of a decent jobs report for the UK before plunging despite there not being a clear trigger to warrant such a move. The jobs report itself paints a much better picture of the UK economy than many people generally have, with unemployment standing at 4% – the lowest since March 1975 – and wage growth nearing its highest levels since the financial crisis.

While these levels are still well below what we were seeing prior to a decade ago, they’re certainly supportive of the Bank of England’s policy of gradually raising interest rates when taken in isolation and the jump in earnings further aids this which is why we saw a bump in sterling. The flip side of this is the one-off factors that are likely contributing to the gains, rather than them being entirely organic and a result of a tight and competitive labour market, not the mention the uncertainty and risk with regards to the outlook.

Commodities Weekly: Gold short bets at highest in 17 years

The plunge in the pound shortly after has got people more interested though as there doesn’t appear to have been much of a trigger, despite the currency slipping from close to 1.31 against the dollar to briefly below 1.30. It has since stabilised somewhere in the middle which suggests there may be something to the move even if the initial drop may have been overdone. If no news surfaces, it will be interesting to see whether the pound regains the lost ground over the course of the rest of the session.

GBPUSD Daily Chart

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EUR edges lower despite better sentiment surveys

The euro has also been in gradual decline over the course of the morning in Europe. An improved and better than expected ZEW economic sentiment survey for the eurozone and Germany appears to have done little to halt the decline, which is potentially due to the fact that it continues to languish around multi-year lows despite this minor reprieve. The US engaging in a trade spat with the region and using its auto industry as the pressure point is not doing much to help confidence at a time when it already appears to be experiencing a slight slowdown.

EURUSD Daily Chart

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Another Brexit bounce

Brexit, US/China tariffs and US/EU negotiations remain in focus

Trade continues to be at the forefront of people’s minds at the minute, be that the risk of a trade war between the world’s two largest economies, potential deals between the US and EU as negotiations get underway or the future relationship of two allies after Brexit. The EU has stolen much of the focus this week, with Michel Barnier yesterday talking up the prospect of a deal on the UK’s exit from the EU in the next six to eight weeks which would avoid a damaging no deal Brexit scenario.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

UK in the spotlight after Swedish election

Swedish populists the big winners in weekend election

It’s been a slow start to the trading week, with political stories broadly dominating in Europe as the Swedish election provided the inconclusive result many expected, with the now all too familiar addition of a surge in support for populists.

The result now means days or weeks of negotiations which is something we’ve become quite accustomed to in the current polarised political environment. Immigration was once again a hot topic during the campaign, with mainstream parties being punished for having not taken a hard enough stance on it, as has been the case in numerous elections across the EU in recent years and was a key factor in the UK’s decision to vote to leave in 2016.

While the election in Sweden may not have any knock-on effect to other European countries, it once again serves as a reminder to the EU that free movement may be fundamental to its ideals but it’s also contributing to the rise of nationalist parties. Brexit is unlikely to be the final casualty if leaders continue to bury their heads in the sand and hope it’s just a phase that passes, an approach many expect to be taken.

Trump trade war worries

Ambiguity seemingly the trick to progressing Brexit talks

While growing support for a “people’s vote” suggest Brexit isn’t quite final yet, the exit door is drawing ever nearer and more and more it seems as though the best way to deal with some of the stickier points is going to be to kick the can down the road and deal with it another day. That’s certainly the message we’re getting recently if reports are to be believed which in a way will come as a relief to businesses as it suggests leaders will do whatever it takes to avoid a cliff-edge scenario.

The flip side of that is that it means negotiations are now going to drag on for another two years with officials squabbling in public over various issues. In the near-term though, this may be positive for the pound and the economy if it gives business peace of mind and even potentially allows them to invest with some confidence. Of course, that may just be an overly optimistic view.

Are tariffs on all Chinese imports to come?

BoE meeting eyed as UK growth surpasses expectations in July

Politics aside, this should be a very interesting week for the UK with a number of different data points being released and the central bank meeting. This morning we’ve had monthly GDP data out for July which showed the economy growing by 1.6% compared to a year earlier, slightly ahead of expectations. While the pound initially jumped on the release, it wasn’t hugely significant and didn’t last very long which suggests traders aren’t overly impressed with the number, despite the beat.

GBPUSD Daily Chart

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The Bank of England decision on Thursday will be of more interest, coming a month after it raised interest rates to a post-financial crisis high despite the significant uncertainty facing the economy and relatively mixed data seen over the course of the year. While another hike isn’t on the near-term agenda, with policy makers agreeing that futures increases need to be gradual, hinting at roughly one per year over the next few years, traders will be keen to hear the central bank’s on the recent developments.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.