Having spent most of this week ignoring the prospect of an escalation of US-China tension over Hong Kong, despite various smoke signals throughout the week suggesting a confrontation was brewing, US markets turned tail sharply late last night on reports that President Trump was going to be holding a press conference later today on China.
Earlier this week US Secretary of State Mike Pompeo said that the US no longer considered Hong Kong as no longer autonomous from China, and as such would mean that the region would no longer be subject to the favourable trade relationship currently in place.
The US house also passed a bill, earlier this week authorising sanctions against senior Chinese officials for human rights abuses, against Muslim minorities, so today’s press conference could well up the ante further, if President Trump signs off on that bill as well as implementing further measures that might hint that the US is keen to send the Chinese a message.
This sharp reversal in the last hour of US trading, merely goes to show that markets not only see what they want to see and hear what they want to hear, but that they also choose when they want to as well.
The announcement of today’s press conference is probably as a result of yesterday’s vote in the China’s National People’s Congress that approved the controversial new security law for Hong Kong.
Up until then US markets had been trading strongly, shrugging off yet another 2.1m jobless claims, taking the total number of claims over the last few weeks to over 40m, though on the plus side continuing claims fell back by 4m.
The late fall in US markets last night is likely to see markets here in Europe open lower after they finished the day higher yesterday, for the fifth day in succession.
We should also be mindful that we are coming to the end of the week, as well as the end of the month so we could see this play a part in today’s price action given that over the last two months markets in Europe have only managed to reverse just over half of the March losses, while US markets have reversed the March losses completely.
Today’s focus is set to be on the upcoming Trump press conference, as well as a host of economic updates from Germany, France and Italy, as well as the US.
We start with German retail sales for April which are expected to crumble by 12%, an even bigger decline than the 5.6% decline seen in March, and indicative that however bad the data has been thus far for Q1, it’s going to be even worse as we get sight of the numbers for Q2.
This is an area where markets could be underestimating the extent of the economic damage that has been done to the various economies across Europe.
France is also expected to see confirmation that its economy contracted by 5.8% in Q1, a number which could be revised lower, while personal spending in April is expected to fall 14.7%, a slightly smaller decline than the 17.9% decline seen in March, but still sizeable nonetheless, and an early insight into Q2. On an annualised basis, this equates to a 32.2% decline.
In Italy Q1 GDP is expected to confirm a decline of 4.8%, with again the risks tilted to the downside in terms of a bigger revision lower.
In terms of inflation, and an ECB meeting next week, the demand shock we’ve seen in the past few weeks, as well as the slide in oil prices, is likely to see the latest preliminary EU CPI numbers for May show headline CPI fall from 0.4% to 0.1%.
With a 2% target the ECB is not even close to hitting its inflation target, and while core prices are expected to remain fairly steady at 0.8%, the ECB will be hoping that the reopening of economies across Europe will pull the CPI figure off the floor where it currently is now.
In the US, having seen the number of weekly jobless claims move sharply higher through the month of April it stands to reason that personal spending for the month will fall even faster than it did in March. In March we recorded a record low of -7.5%, as headlines started to reach US shores about the rising global death toll of Covid-19. When the US economy went into lockdown, as cases started to rise in New York, there was still just under two weeks of March left to go. Having remained in lockdown for all of April it stands to reason that the record low seen in March is likely to be fairly short-lived with an even bigger decline expected, with estimates in the region of -12.8%.
EUR/USD – starting to break higher, pushing above 1.1035 and opening up the prospect of a move towards the 1.1200 area. Support should now come in around the 1.1000 area and the 200-day MA. A move back below the 200-day MA suggests a return to the 1.0870 area.
GBP/USD – currently finding support in or around the 1.2200 area with the 1.2400 area the next key resistance. Trend line support from the March lows comes in at 1.2240, with a break below the lows this week opening up the lows last week at 1.2075, with support below that at 1.1980. A move through 1.2400 reopens the recent highs up near the 1.2650 area.
EUR/GBP – the 0.9000 level continues to cap, with a break targeting the 0.9080 area. While below the 0.9000 area the risk remains for a move back to the 0.8870 level and the lows this week.
USD/JPY – trading quietly at the moment below the 108.00 level with the 108.30 a key resistance. A move through 108.30 and the 200-day MA targets the 109.00 area. Currently has support at the 107.30 area.