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China holds line regarding trade, Europe poised for higher open

Equity markets in Asia are mixed after China released a series of economic indicators.

Chinese industrial production came in at 6.1%, and economists were expecting 6%. The retail sales report was 9%, and dealers were anticipating 8.8%. Fixed asset investment was 5.3%, and the forecast was 5.5%. The Beijing administration have said they will not buckle regarding trade negotiations. China has lifted foreign ownership restrictions on credit rating agencies, and the move underlines the country’s determination to become a more open economy. It could also pave the way for more international investment in the domestic economy, which would be good for business.

It was a busy day in terms of central bank updates yesterday as we heard from the Turkish central bank, the Bank of England (BoE) and the European Central Bank (ECB). The Turkish lira was jolted higher by the interest rate hike from 17.75% to 24%, and the embattled currency managed to hang on to most of its gains. The move may take some pressure off the currency in the near-term, but the country’s high CPI and even higher PPI rates are likely to be a problem in the medium-term.

The BoE update was largely uneventful as policy was left unchanged, meeting forecasts. The central bank lifted the third-quarter growth forecast to 0.5%, and announced that consumption is rising. This was encouraging as it reaffirms their own decision to hike rates late month. Yesterday the BoE chief, Mark Carney, warned that a no-deal Brexit could see interest rates rises, and house prices might fall up to 35%. The markets had a muted reaction to this, probably because there were similar warnings about the EU vote itself that didn’t play out. Sterling will remain in focus as Mark Carney’s speech in Dublin will be published at 11am (UK time).

The ECB kept interest rates on hold, meeting economists’ expectations. The central bank is currently buying €30 billion worth of government bonds per month. That will be trimmed down to €15 billion per month come October, and the scheme will be wound down at the end of December, which came as no major surprise. Growth forecasts for the currency bloc were trimmed and Mario Draghi, the bank’s chief, warned about the rise of protectionism and the potential fallout from emerging market economies slowing down. The EU-US trade deal still has to be settled, and Turkey’s problems are far from fixed. Mr Draghi confirmed that significant monetary stimulus is still needed, and this largely helped eurozone equities.

For the central bank updates, it was the US inflation report that moved markets. The CPI rate dipped to 2.7% from 2.9%, and that triggered a round of selling of the US dollar and encouraged traders to snap up US stocks. The cooling in the cost of living rate might encourage the Federal Reserve to slow down their monetary tightening cycle. US retail sales will be reported at 1.30pm (UK time), and the consensus estimate is 0.4% - a decrease from the July figure of 0.5%.

The US-China trade spat is a little less of a concern for investors. On Wednesday, the US said they were seeking to restart trade talks with Beijing, and yesterday President Trump claimed there is more pressure on China to get talks going in light of their relatively weak stock market and currency. The lack of threatening language from both sides has left traders feeling optimistic, and major US indices resumed their wider upward move. A strong stock market gives Mr Trump the impression he is winning the trade spat. 

In stark contrast to the move on Wednesday, oil endured a major sell-off last night. Hurricane Florence was downgraded to a category two storm from a category four, and that prompted dealers to unwind previous long positions. The International Energy Agency revealed that global oil supply reached a record of 100 million barrels per day. The organisation predicts that non-OPEC production will expand in 2018 and 2019, largely because of ‘relentless’ growth from the US. WTI and Brent crude oil may be off their recent highs, but they remain in their recent upward trends.  

EUR/USD – despite the decent bounce back between mid and late August, the market remains in the wider downward trend that began in April, and while it stays below the 1.1750 level, its outlook could remain bearish. 1.1510 might act as support and a break below that mark could bring 1.1300 into play. If 1.1750 is cleared, 1.1850 could be targeted.

GBP/USD – has been pushing higher since mid-August, and if it can hold above the 1.3000 mark, it could edge up towards the 1.3200 area. A move below 1.3000 might bring 1.2785 into play, and below that support might be found at 1.2661.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8834 – 200-day moving average. If the wider uptrend continues it could target 0.9100 or 0.9160. 

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.79 – the 200-day moving average.

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