The weekend decision to press the pause button on an escalation to the ongoing trade dispute between China and the US has helped December get off to a decent start for equity markets and risk assets in general. While not ideal that nothing has been resolved in the short term, the move does remove a short-term hurdle for investors, hence yesterday’s rebound, even if the problem is likely to come back into focus in the early part of next year.
It has also enabled US markets to pick up where they left off on Friday with another day of strong gains, following on from a strong start to the week in Asia and Europe.
Away from the relief that an escalation has been averted it still isn’t immediately clear what each side has agreed to implement, given some of the claims being made by President Trump around the reducing and removal of tariffs on US-made auto imports onto the Chinese mainland. This claim doesn’t appear in the declaration over what was agreed by both sides at the weekend, so it’s not immediately apparent why the US president believes that China has agreed to this, particularly since the US hasn’t reciprocated in any other way, and China has held back from confirming it.
That being said the overall tone was a lot more positive than had been the case just over a week ago, with treasury secretary Steve Mnuchin also expressing optimism about future progress, while Larry Kudlow, Trump’ s chief economic advisor said that both sides were “pretty close” to an agreement on intellectual property theft.
We also had some more dovish commentary from a number of Fed officials with permanent member Lael Brainard stating that she felt inflation was now “around target”, while vice chair Richard Clarida suggested that the risk of too low inflation was starting to outweigh the risk of too high inflation. Both these comments would suggest that the Fed is near to the end of its current hiking cycle. Yesterday’s sharp falls in the prices paid component of the ISM manufacturing report for November would appear to support that assessment, as prices fell from 71.6 to 60.7, the sharpest fall in six years.
Markets in Asia have gone into reverse after Monday’s gains as investors concerned themselves with the lack of detail and differing accounts over the apparent trade détente between China and the US. Some of the questions being asked have included as to what has really been resolved, and whether the differences can easily be resolved in the next 90 days. All of these are valid questions, but surely they are questions for next year and not for the here and now. In any case this uncertainty looks set to translate into a broadly lower open in Europe this morning.
Away from the geopolitics the latest economic data out of Europe was a little disappointing to say the least with the latest manufacturing PMI’s painting a worrying picture for Europe’s three biggest economies. The Italian manufacturing survey showed the sharpest deterioration in four years, sliding to 48.6, a four-year low, from 49.2 and the second successive monthly contraction, while German manufacturing hit a 31-month low.
If this slowdown persists into 2019, or there is a trade escalation between the US and EU, then it could be very difficult for the ECB to be able to react in any significantly meaningful fashion, particularly since monetary policy is already fairly accommodative.
In the UK the parliamentary debates on the Brexit withdrawal agreement are set to start today, culminating in next weeks vote on the 11th December. Attorney General Geoffrey Cox went to great lengths last night to outline the pros and cons of the deal, expressing how uncomfortable he was with the deal, while at the same time outlining that it wasn’t a particularly comfortable compromise for the EU either.
On the data front the UK economy continues to hold up well, with today’s construction PMI for November expected to show a modest slowdown from 53.2 in October to 52.5. The manufacturing numbers were slightly more positive yesterday recovering to 53.1 from 51.1.
Bank of England governor Mark Carney is also expected to find himself in the proverbial firing line again today after last week's controversy over the central banks so-called Brexit scenarios. Today’s appearance in front of the Treasury Select Committee to talk about the Brexit withdrawal agreement, and the UK’s future economic relationship with the EU, will also be attended by deputy governors Ben Broadbent and Sir Jon Cunliffe, among others.
EUR/USD – has thus far failed to move beyond the 1.1500 area and this continues to cap the upside. While below here we could see a retest of the 1.1280 level in the short term, with the potential to revisit the lows earlier in November.
GBP/USD – continues to lose ground but is just about hanging onto support at the trend line from the August lows at 1.2700. While above here the recent range is likely to remain intact. Below 1.2600 could well open up a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2840 to stabilise.
EUR/GBP – the 0.8935/40 level continues to cap advances for the time being. Still in the broad range and could slip back towards the 0.8820 area in the short term. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.
USD/JPY – still in the uptrend from the lows this year but we need to break above 114.00 to keep upward bias intact. While below 114.00 the risk remains for a move below the 112.50 level and towards 111.80. The bearish weekly reversal of two weeks to go remains valid while below 114 20.