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Risk aversion starts to grow as trade concerns escalate

If there were any doubt at the end of last week as to whether investors were becoming increasingly nervous about where discussions on trade were going then yesterday’s price action would appear to suggest that these doubts are becoming bigger on reports that the Trump administration is looking to up the ante further by announcing restrictions on Chinese investment in certain US industries on the grounds of national security.

While these reports were later dismissed as false #fakenews in a tweet by Treasury Secretary Steve Mnuchin he did say that any restrictions would include any country that attempts to steal US IP, with details out by the end of the week. Despite this woolly denial it is clear that the US administration appears to be taking aim at China in this regard. Later in the day, just to reinforce what a farce US trade policy is when it comes to consistency President Trump’s chief trade advisor Peter Navarro said there were no such plans at all. This managed to prompt a rebound in US markets but not by enough to see a positive close, though we could well see a positive European open.

Adding to concerns about new tariffs on motor vehicles from the EU, after the EU announced its retaliation to Trumps metals tariffs last week, as well as the prospect of a further $200bn of new tariffs on Chinese goods, the US administration now appears to be shifting its attention to another of President Trump’s bug bears, namely the alleged theft of US intellectual property, which has consistently been a bone of contention for the US President. The next question for investors now given the confused messaging coming out of the Trump administration is whether this is the latest attempt to keep his opponents off balance or whether he is serious about further escalation.

These reports have only added to the weakness in European markets seen over the past few days, with the DAX and FTSE100 seeing the biggest falls yesterday, with the DAX closing at its lowest levels in two months.

The FTSE100, in stark contrast to Friday’s strong rebound saw its worst daily loss since February with commodity stocks leading the decliners, despite an attempt by Chinese policymakers to offset the effect of tariffs by relaxing reserve requirements to the tune of an extra $108bn. These actions had little to no effect, while a sharp fall in Brent crude prices reversing some of the Friday rebound also weighed as oil company shares fell back.

Prices initially rallied at the end of last week after OPEC announced a rise in output that was below expectations, however further details announced at the weekend suggested that OPEC was concerned about supplies getting too tight in the months ahead.

Despite the rising escalation in trade war rhetoric and the sharp declines being seen in equity markets in recent days we still remain well above the lows seen earlier this year. That’s not to say that investors are complacent but yesterday’ s break out in the DAX could be the first sign that the dam may be about to break on an even bigger sell-off with European markets at the epicentre.

Automakers in particular are looking vulnerable, as concerns grow about the effects around future trading relationships, not only with the US, but the UK as well, after BMW warned yesterday of the effects a no Brexit deal would have on its profitability. The raising of trade barriers in two of the company’s biggest markets would decimate its profitability, along with the rest of the German auto sector.

Both the UK and EU need to think long and hard about their future trade relationship in the coming months at a time when trade with the US could become much more difficult.

The pound has slipped a little in recent days over concerns about the timing of a future rate rise. With Ian McCafferty leaving the monetary policy committee in August and the addition of Andrew Haldane to the hawk camp at the last rate meeting, attention will turn to Jonathan Haskell and his views on monetary policy when he testifies to MP’s today as Ian McCafferty’s replacement. In particular markets will be looking to establish whether he falls into the hawkish or dovish side of the argument when it comes to raising rates.

EURUSD – looks set to retest the 1.1720/30 area with a break of 1.1750 arguing for a move towards 1.1920. We now have support at the 1.1620 area with a break below 1.1600 arguing for a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.

GBPUSD – found support last week at trend line support from the 2017 lows rebounding from the 1.3110 area and also posting a key day reversal. Having broken back above the 1.3210/20 area we should now see a retest of the highs this month at 1.3450. A break below 1.3100 opens up a potential move towards 1.2980.

EURGBP – still stuck in the range with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – starting to look a little soft having failed to push above the recent highs at 111.00. We still have support at the 109.20 lows of last week. We could head lower if we break below this area and retest the 108.70 area. While below these recent highs the risk appears to have shifted towards the downside.

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