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Heightened trade tensions hurt stocks

The Dow Jones and S&P 500 posted marginal gains on Friday as the US posted respectable consumer-focused economic indicators. 

The August retail sales and core retail sales reports came in below expectations, but the prior reports were revised higher. Adding to that, the September University of Michigan consumer sentiment report jumped to a six-month high. If the latter report is to be believed, we could see a pick-up in consumer activity in the near-term. US average earnings are higher, and if consumer activity ticks up, that would be positive for the economy.

The yield on the US 10-year government bond exceeded 3% on Friday – its highest level since early August. The economic indicators for the US have been solid recently and the Federal Reserve are meeting next week. Traders are pricing in a high probability of a rate hike next week and there is increased speculation the Fed will hike rates in December too. The US dollar index has been a bit lacklustre lately, but we could see buying in the greenback as the interest rate meeting nears.

Last week we saw the Turkish central bank hike interest rates from 17.75% to 24% in a bid to stabilise the currency, and it worked to an extent. With the exception of Turkey, emerging market (EM) currencies have been off the radar recently. Should we see the US dollar resume its wider upward trend, we could see renewed pressure on EM currencies.

It was reported that President Trump is edging closer to imposing tariffs on $200 billion worth of Chinese imports. It is believed that this round of tariffs could come with only a 10% levy, rather than the 25% that was originally cited. By choosing a lower levy, it could give the US room to put additional pressure on China. Should the protectionist policies be implemented, there might not be a major sell-off in equities, seeing as a certain amount of the fear has already been priced in. Equity markets in China are in the red as rising trade tensions weigh on investor sentiment.

Trade and investment ministers from G20 countries met in Argentina last week, and the group urged the World Trade Organisation (WTO) to reform its policies. There is a growing fear about protectionism, and the ‘America first’ attitude from Mr Trump is making some policy makers nervous. Donald Trump has shown he is willing to compromise, and some flexibility from the WTO could go a long way to ease global trading relations.

Sebastian Kurz of Austria and Angela Merkel of Germany agreed to avoid a ‘hard Brexit’. The two politicians agreed that everything must be done to ensure the UK leaves the EU with an agreement in place. The EU side seems to be softening its stance, and this could give sterling a boost.

According to Rightmove, UK average house prices rose by 0.7% in September, which is a big improvement on the 2.3% decline endured in August. Autumn usually sees an increase in activity and lower the asking prices during the summer may have enticed buyers.

The euro will be in focus today as the eurozone will release the final CPI reading for August. The consensus estimate is 2%, and the preliminary report was 2%. It is worth noting the July reading was 2.1%.

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 0.8835 – 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 109.77 – the 200-day moving average.

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