It’s been quite remarkable the turnaround in sentiment that we’ve seen over the past couple of days, from the pessimism and big falls that we saw on Monday, following on from last week’s declines, to three successive days of gains for European markets, while US markets have followed suit, with the S&P500 getting to within touching distance of the 2,900 level before retreating.

The reaction of Asia markets has been mixed with Chinese markets sharply lower, while the Nikkei225 has pushed up to a one week high, and it is this uncertainty that is likely to see European markets open lower after the big gains of the past few days.

What’s even more puzzling about the recent rebound is that nothing much has changed when it comes to the trade story, if truth be told we’re in a worse place than we were two weeks ago, with new China tariffs set to kick on the 1st June in response to the increase in tariffs from the US side, while the tone from China’s official media has also become a little more nationalist and belligerent in response to recent US tactics.

In response President Trump upped the ante even further by effectively shutting China’s biggest telecoms provider Huawei out of a good proportion of the world’s telecoms network. This is likely to prompt a counter response from China, perhaps in the form of making life a little more difficult for US companies operating in China, Apple being an obvious example.

To explain the sudden turnaround, it would appear that markets are once again pinning all of their hopes on a meeting next month between President’s Trump and Xi at the G20 that could see recent escalations dialled back.

That seems a big ask, and more importantly is also some way off which leaves open the opportunity for things to get worse before they get better. While investors tend to be glass half full types it also needs to be remembered that we’re still no nearer a China trade deal than we were back in January.

We also have slowly rising crude oil prices, which tensions in the Middle East are helping drive up, which will do nothing to make life easier for consumers, at a time when US driving season starts in earnest. Add in the warning from US retail giant Walmart yesterday that prices are likely to have to rise as tariff increases start trickling down the supply chain, and you have a situation where the economic outlook could darken quite quickly.

For now, inflationary pressures appear fairly subdued and with jobless claims in the US still at multi decade lows the outlook still looks quite positive.

It is a slightly different story in Europe, though even here we have seen signs of an improvement in some of the wider data, and with auto tariffs getting deferred for at least six months, there is now time for US and EU officials to make progress on trade talks separately from China.

On the data front the latest final EU CPI numbers for April look set to confirm that prices picked up from the levels in March, with core prices rising from 0.8% to 1.2%. the headline figure is also expected to be confirmed at 1.7%, up from 1.4%, which is likely to be well received by officials at the European Central Bank.

The pound is also likely to be in focus on the back of nine successive daily falls against the euro, as speculation grows about the future of UK Prime Minister Theresa May, and any likely successor. While some have put the fall in the pound down to the prospect of Boris Johnson replacing her, it doesn’t change the overall mathematics in the House of Commons.

What it might do is make the prospect of a General Election much more likely and given the current polling numbers, it would make the prospect of a Jeremy Corbyn led Labour Government a much closer proposition. In light of some of the recent reports about Labours economic policy that is likely to be a significantly bigger worry for investors, and markets in general.

We also have another IPO coming out of the blocks today as Avantor a company that provides services and products in education, healthcare and biopharma starts its first day of trading, albeit at a lower valuation initially estimated. It has lowered its price range from $18 to $21 to between $14 to $15 as it looks to raise $3bn as opposed to the previous $4bn.

EURUSD – has continued its slow drift lower from the 1.1220 peaks this week as it looks to drift back to the recent lows at 1.1110. The bias remains for a lower euro while below 1.1270 with a move towards 1.1000 still the favoured outcome.

GBPUSD – the pound has continued to fall, with the February lows at 1.2765 the next key support level. A move through here has the potential to head towards 1.2500. We need a move back through 1.2860/70 to stabilise and argue for a move back towards 1.2960.

EURGBP – nine days of gains has seen us push above 0.8720 and could see a move towards 0.8800 and the 200-day MA. Below 0.8720 argues for a move back to 0.8670.

USDJPY – appears to have found a short-term base at the 109.00 area for now and could head back towards the 110.30 area. While below 110.30 the risk is for further declines towards the 108.00 area. It would need a recovery back above the 110.30 area to stabilise and signal a move back towards 111.00.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination