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Currencies in focus, as European markets continue to underperform

US markets continue to trade in a sweet spot of divergence as both the S&P500 and Nasdaq pushed up to new record levels as optimism over a buoyant US economy, the recent NAFTA agreement with Mexico, rolled into rising confidence that a similar agreement may well be reached with Canada by the end of this week.

While this seems a little optimistic given recent comments from Canadian Foreign Minister Chrystia Freeland that much work still needs to be done to iron out the details, market reaction would suggest that even if the deadline were to slip, investors seem optimistic that a deal will eventually be reached.

Canadian Prime Minister Trudeau outlined the stakes with respect to a NAFTA deal by stating that no deal is better than a bad deal. Now where have we heard that before?  

Curiously the Dow Jones industrials hasn’t been able to match the heady heights of earlier this year, however it does seem to be a bit of an outlier in this regard.

This divergence in US markets can probably be partly explained with the benefit of a bit of a safe haven bias, with investors preferring a strong economy, as opposed to the more risky bets of emerging markets, as the rising US dollar puts downward pressure on various currencies. The Turkish lira has remained under pressure, as a result of this week’s largely expected downgrade of Turkish banks, while the Indian rupee has also hit a new record low.

Markets in Asia have continued to be dominated by concerns over simmering China trade tensions, and the prospect of further tariffs next month, while markets in Europe have also slipped back on the open. The unresolved nature of the EU US trade talks is clearly acting as a drag on European markets in the same way that markets in Asia have continued to lag behind.

Both the New Zealand and Australian dollar have seen big slides in Asia trading on the back of weaker than expected economic data. A sharp fall in business confidence in New Zealand has seen the Kiwi fall sharply as traders speculate that the RBNZ may well be forced to cut rates.  The Australian dollar has also come under pressure after the latest data showed that capital investment slid 2.5% over the last quarter, while building approvals also slid sharply by 5.2%, a sharp reversal on the previous month.

Yesterday’s more emollient tone from EU chief negotiator Michel Barnier that the UK could well get a bespoke deal from the EU helped give the pound a well needed push higher, particularly against the euro where it had been languishing at one year lows. These gains appear to have been sustained overnight as markets start to price in the prospect of a more pragmatic approach from both sides as we approach the October/November deadline.

Putting to one side all of the other political noise around the Brexit talks, this significant change of tone could well prompt further gains for sterling in the coming days.

On the companies front UK recruiter Hays saw a rise in full year operating profits of 15%, to £243.4m, helped by strong growth in its international businesses in Australia, and Germany, probably helped by a weaker pound.

Even the UK business saw operating profit rise by 13%, helped by a rise in new fees of 2%, not bad in an economy that is supposed to be racked with Brexit uncertainty.

The company also hiked its dividend by 18%, as well as issuing a special dividend of 5p a share.

Smurfit Kappa shares have continued to slip back in the wake of yesterday’s news that the Venezuelan government seized control of the company’s Venezuela operations for 90 days while detaining two of its employees.

Ahead of the US open, which is likely to be slightly lower, on the back of today’s weaker Asia and European sessions, Ford shares are likely to be in focus after Moody’s downgraded the US car giant’s credit rating to one notch above junk, with a negative outlook.  Concerns over the costs of the new restructuring, at a time of shrinking margins in its home market, as well as continued losses in Europe.

This week’s modest revision to US Q2 GDP, up to 4.2% points to a US economy that appears to be firing on all cylinders, and today’s inflation data could well reinforce expectations around the prospect of two more rate rises this year. US core PCE is expected to remain at 2%, while the latest EU measure of core CPI remains anchored down at 1.1%.

Strong US personal spending data for July of 0.4% is also likely to reinforce another strong quarter for the US economy, which is likely to translate into expectations of a +3.5% GDP number in Q3.


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