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Geopolitics help stocks, but trade concerns linger

Equity markets in Asia are largely higher after the US government confirmed it is in the process of arranging a second meeting between President Trump and the North Korean leader Kim Jong un. 

The announcement is seen as a step in the right direction for political stability in the region. Political and business relations are on the mend elsewhere as Russia and China are looking to launch projects worth $100 billion via scores of joint ventures, and this has lifted investment sentiment too.

Stock markets had a broadly positive day yesterday despite all the ongoing uncertainty regarding trade tensions and struggling emerging market (EM) economies. The trade spat between the US and China rumbles on, and President Trump has the fire power to step it up to a full blown trade war. Mr Trump has up to $467 billion worth of tariffs on Chinese imports at his disposal, but he hasn’t budged so far. Beijing has made it clear they will retaliate should Washington DC slap additional tariffs on Chinese imports. The situation is unlikely to fade away, so dealers are likely to remain on edge.

The US still has unfinished business with Canada and the EU when it comes to trade, and that is playing into the mix too.   

Yesterday was a quiet day in terms of economic indicators from the US, and the pullback in the greenback gave EM currencies a breather. The US economy is still head and shoulders above most Western economies, and the dollar’s wider bullish run this year is likely to continue, and that could trigger a further sell-off of EM currencies.  

The Brexit saga continues and yesterday the pound received a boost from the EU’s Michel Barnier, who said it is realistic that a deal could be reached in the next six to eight weeks. Traders have a track record of snapping up sterling whenever it seems likely that a deal can be reached, but the devil is in the detail, and the finer points still have to be hammered out, and more importantly, agreed upon by all sides.

Boris Johnson grabbed headlines over the weekend when he attacked Theresa May’s Chequers plan, and once again it would appear that Mr Johnson is angling for a crack at the top job. The former foreign secretary is keen to stay in the spotlight on the run up to the Conservative party conference which starts at the end of this month.

The UK economy grew by 0.6% in the three months between May and July. This morning at 9.30am (UK time) the UK will release the latest unemployment and earnings figures. The jobless rate is expected to remain steady at 4% and three-month-average earnings until July are expected to hold steady at 2.4%. Like with the US economy, the labour market is very strong, and traders will want to see a boost in earnings, as that will be key to the British economy maintaining its momentum.  

At 10am (UK time) the German ZEW economic sentiment reading will be released, and the consensus estimate is -14, which would be a further fall from the -13.7 reading in August. The indicator has been in negative territory since April, and it is worth noting the DAX has been broadly moving lower since May.

The cost of borrowing for the Italian government has been waning recently and that should help eurozone equity markets. Matteo Salvini, Italy’s deputy prime minister, admitted he keeps a close eye on the government bonds market, and this tells us he is more fearful of the financial markets than he previously let on. Mr Salvini wants to contradict Brussels and boost public spending as a way of stimulating the economy, and he must be measured in his moves as he doesn’t want a surge in the country’s borrowing costs.

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 to the downside 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 0.8833 – 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.

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.


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