Sterling Down on May Brexit Warnings

May resorts to rehashing old threats after failed Salzburg meeting

Theresa May took to the podium on Friday in an attempt to hit back at the EU after she was humiliated in Salzburg in what was meant to be a positive meeting ahead of the Tory Party Conference.

While May will be desperate for the takeaway from the speech to be that the UK is serious in its no deal threats and the EU should take their proposal seriously and resume dialogue based on the government’s Chequers plan or risk such an outcome, the speech itself was nothing but a stern rehash of what has been said in the past. As ever, these talks are showing themselves to be a frustrating and soul destroying game of chicken among a group of officials that agree that no deal is a bad outcome but are determined to drag them out in the hope of slightly better terms.

The pound came under pressure in the lead up to May’s speech and that continued during and in the aftermath, with traders potentially seeing this as a sign that no deal is a real and increasingly likely outcome. That may be exactly the message May wanted to send to the media, her party – particularly the Brexiteers – and the EU but I do not believe it changes anything. A fudged 11th hour deal that kicks the can down the road on the toughest decisions still remains the most likely outcome and I do not believe the appetite exists on either side for no deal that makes it as likely as we’re being led to believe.

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Sterling lower as EU rejects May Brexit proposal

Investors in buoyant mood despite trade tariffs

Investors continue to brush off the ongoing trade dispute between the US and China, along with negative Brexit developments in Salzburg, with stocks in Europe trading higher to end the week.

Another winning day would cap a very good week for stock markets, with the Dow and S&P 500 both trading in record territory – the first time for the former since January – and those in Europe and Asia very much taking new US and Chinese tariffs in their stride. This may be a case of the tariffs already being priced in or being a little softer than was expected, but the important thing is it’s far from the end and investors may not be so buoyant if Donald Trump responds quickly and aggressively as he’s suggested he will.

Sterling slips as May is humiliated in Salzburg

The pound is paring its gains on Friday after the EU rejected Theresa May’s Chequers proposal, casting doubt on a compromise being found despite the UK being only months from leaving the block. Clearly traders don’t view this as too significant a setback or I would expect the drop off in the currency to be much larger and the rejection hardly comes as a surprise given that officials have publicly criticised the proposal in the past.

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That said, reports do suggest that EU officials have taken a harder line against May following her insistence that it’s Chequers or no deal. Clearly they believe this is a bluff and haven’t taken to kindly to such a stance so late in the day. May now faces a tough challenge in returning to the UK ahead of the Conservative party conference no closer to a deal than she was before, leaving her with a massive target on her back as certain colleagues look to position themselves as a better alternative.

Euro edges lower on weaker PMIs

The euro is also paring earlier gains after PMIs for September painted a slightly gloomier picture, particularly for the manufacturing sector where trade conflicts, Brexit and falling global demand contributed to a decline in optimism. Manufacturers are clearly a little nervous about the number of risks for the sector and the volatility and difficulties in emerging markets right now will not be giving them much reason for optimism.

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The euro area has been experiencing something of a slowdown for much of the year but this hasn’t deterred the ECB which still plans to end its bond buying program in December and consider a rate hike in the second half of next year. The latter plans may be shelved though if the economic situation doesn’t improve, something policy makers hope will naturally follow an easing of trade tensions and resolution on Brexit. Right now though this feels a long way away.

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Brexit, UK consumer and trade in focus (video)

Nick Batsford, CEO of Core London is joined down the line by Craig Erlam, Senior Market Analyst at OANDA, to discuss why the pound has rallied on Thursday and the latest developments in the US-China trade spat.

 

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.

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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.

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Live FX analysis – 18 September 2018 (Video)

Senior Market Analyst Craig Erlam discusses the key market themes from the summer – most notably US tariffs and Brexit – and the events to watch out for this week.

Craig also gives his live analysis on EURUSD (17:48), GBPUSD (21:36), EURGBP (24:42), AUDUSD (25:44), USDCAD (28:33), GBPCAD (31:02), NZDUSD (32:41), USDJPY (34:16), GBPJPY (35:25) and EURJPY (36:31).

US Futures Higher Despite New Chinese Tariffs

New tariffs already priced in

Investors have taken US President Donald Trump’s announcement of new tariffs against China in their stride on Tuesday, with indices across much of Asia and Europe in the green and US futures a little higher.

The tariffs have been talked about for some time now and it was only a matter of time until the announcement came so there was no reason to expect too much of a response, unless either the final number was higher or the list included unexpected items that investors deemed damaging. Not only did neither of these happen, but some expected items were not included on the list and the tariff will only be 10%, rising to 25% at the end of the year if negotiations don’t move forward, a minor positive.

The ball is now in China’s court, how they respond will determine how big an escalation we can expect and what the economic and market price will be. So far, the economic impact has been minimal but we’ve only just entered into significant tariff territory. The greatest impact has come in the markets, with Chinese stocks having fallen into bear market territory and the yuan having fallen more than 10% against the dollar.

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DAX higher despite new Trump tariffs

Will Trump follow through with more tariffs?

The interesting result of this is that the currency move has largely offset the impact of the tariffs on Chinese goods and the trade deficit has widened, I’m sure much to the frustration of the Trump administration. If we see a similar result from these tariffs and the impact on prices at home is more significant, I wonder whether Trump will revisit the strategy or just persisxt and attempt to inflict as much damage on China and its markets as possible.

US and China Trade Data (2018)

US Census Bureau

China obviously doesn’t have the tariff firepower that Trump has but appears to be adopting a different strategy for getting under the skin of the Trump administration. Aside from counter-tariffs, more of which will likely be announced very soon, China has shown a willingness to forge closer ties with others and reduce its reliance on the US, most notably Russia, something that will make lawmakers very uncomfortable and could hurt the US much more in the longer-term.

Ultimately, I’m sure investors would rather that common sense prevail and both sides return to the negotiating table and find a solution that removes tariffs and promotes free trade but it doesn’t feel like we’re any closer to that, especially if China follows through on reported threats to reject an invitation for talks if Trump follows imposes more tariffs.

Asia closing market notes : riding the risk rollercoaster

Politics likely to remain primary driver of markets

While there are a number of notable economic events that investors should pay attention to over the course of this week, politics has been dominant and I don’t see that changing, especially as Brexit negotiations continue with the deadline fast approaching. The pound has been extremely sensitive to Brexit reports recently, no matter how minor the comments appear to be and it’s likely that will continue until we start to see some significant progress.

Economic Calendar

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All Brexit outcomes will come at an economic cost

All “likely” Brexit outcomes will entail a financial hit for the U.K. economy, the International Monetary Fund (IMF) warned on Monday.

But, it said, a disorderly “no-deal” scenario — where Britain leaves the European Union without any kind of trading relationship in place — would be much worse.

“While all likely Brexit outcomes will entail costs for the U.K. economy by departing from the frictionless single market that now prevails, an agreement that minimizes the introduction of new tariff and non-tariff barriers would best protect growth and incomes in the U.K. and EU,” the IMF said in its latest report on the outlook and risks to the world economy, published Monday.

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Markets flat on China tariff expectations

Investors await new Chinese tariffs

It’s been a mixed start to the week in financial markets as investors await a possible announcement of new tariffs on China which could come as early as today.

The ongoing conflict between the US and China continues to be a primary driver of market sentiment, with investors concerned about the prospect of a full blown trade war as neither side shows a willingness to blink. It was reported last week that the US invited Chinese officials for further talks, something they were open to but reports over the weekend suggest this wouldn’t go ahead if Donald Trump follows through on threats of tariffs on another $200 billion of goods.

With China threatening to cosy up with Russia and the EU if Trump continues with this hostile trade approach, it will be interesting to see how the White House responds as lawmaker opposition may grow. Trump clearly thought this would be a straightforward monetary fight and may have been caught off guard by the willingness to use alternative tactics to fight back. Investors in the US are continuing to take this in their stride for now but that may not last.

DAX slips on fears of more US tariffs on China

Positive Brexit comments offer hope for deal

The UK will be hoping to use the more hostile and fractured geopolitical environment to its advantage as Brexit negotiations continue. The deadline is fast approaching and we appear to be hearing a more open tone from EU officials who clearly view the risk of no deal Brexit as being very real and damaging and are therefore keen to avoid it. While the EU will still be fully committed to ensuring the UK doesn’t cherry pick post-Brexit and the single market integrity is protected, officials will be keen to minimalize divisions.

IMF pessimistic on UK outlook particularly in no deal scenario

It’s this that I believe will ensure a damaging no deal Brexit is avoided rather than the worry of economic implications for the EU, which of course there also would be. The IMF warned of just that this morning, claiming that even under a broad Brexit agreement the economy will only grow at around 1.5% over the next two year, with a disruptive Brexit being significantly worse.

These pessimistic forecasts for the UK, both in the deal and no deal Brexit scenarios, won’t come as a surprise to anyone and will likely be heavily disputed by those Brexiteers who have constantly attempted to downplay the analysis of supposed experts. While the forecasts are gloomy, the expectations for a deal appear to be improving along with the more conciliatory comments in the media which is providing support to sterling.

No tariffs, now tariffs, what gives?

The pound has run into some resistance around 1.3150 but continues to trade above 1.30 this morning after the IMF forecasts. I think this reflects a slightly more optimistic investor and assuming negotiations don’t suddenly turn sour, it could be a sign that the pound sell-off has run out of steam.

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Economic Calendar

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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.

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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

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