Europe

Having got off to a slow start after President Trump criticised the Federal Reserve for its policy of pushing rates up, European markets got an extra reason to roll over and go “risk off” after the US President said he was ready to go with new tariffs on all $505bn worth of Chinese goods imported into the US. He wasn’t finished there either, as in a tweet storm he then blasted China and the EU for manipulating their currencies lower in order to gain a competitive advantage.

For a number of years now there has been this universal myth that the US has worked on the basis that a strong US dollar is good for the US economy as well as the rest of the world, otherwise known as the “strong dollar policy”. It is supposed to encourage investors to buy US debt in the knowledge that the US administration won’t deliberately weaponise the greenback and debase its currency.

To some extent that policy lost a lot of its credibility in the reaction to the financial crisis, post 2008, and while US officials have never explicitly acknowledged a desire so openly for a weaker US dollar in the past they have also never really complained about a strong currency until recently.

This changed at the beginning of the year when Treasury Secretary Steven Mnuchin suggested that a weaker US dollar might be helpful, and this afternoon President Trump added his two cents worth, calling out the ECB and People’s Bank of China for currency manipulation, saying that the strength of the US dollar was hurting the US economy.

These comments will make for an interesting G20 finance ministers meeting this weekend in Buenos Aires, but it does appear that not only do we appear to be heading for a trade war, but it also looks like currencies are about to be brought onto the field of battle as well, as the US administration tries to limit the effects of its own fiscal stimulus.

The biggest fallers today have been the automakers with Volkswagen and BMW sharply lower, but the losses have also pulled in BASF, Siemens as well as Deutsche Bank, while on the FTSE100 the worst fallers have been in basic resources and industrials with CRH, Melrose and BHP Billiton all near the bottom of the index.

US

US markets opened lower today in the wake of President Trump’s comments to slap tariffs on the rest of China’s $505bn worth of imports into the US, along with his comments about the strength of the US dollar. Unlike European markets they appear to be holding up against the backdrop of possible escalations between the US and the EU and China, unlike markets in Europe which have come under heavy pressure this afternoon.

On the earnings front Microsoft saw its Q2 earnings come in well above expectations on both revenues and profits after the bell last night. The company also raised its guidance for the remainder of the year, with its cloud business helping push profits to record levels, along with its share price.

General Electric latest Q2 numbers came in broadly in line with expectations, however margins came in slightly lower as the company continues to progress with its restructuring program.

FX

After a decent run to the upside this week the US dollar has fallen back sharply today, largely as a result of last night’s comments from President Trump, where he was critical of the Fed and the recent strength in the currency. His follow-up comments this afternoon have accelerated this decline as traders decided to take profits on their US dollar long positions ahead of the weekend.

The Chinese yuan has also whipped around hitting its lowest levels this year, before rebounding strongly from its lows after President Trump’s tweet storm earlier this afternoon.

The Canadian dollar is one of the best performers after the latest May retail sales and June inflation data came in better than expected. May retail sales saw a rise of 2%, well above expectations of a 1% rise while June inflation jumped from 2.2% to 2.5%, raising the prospect that we might see another rate rise from the Bank of Canada by year end? 

The pound has had a bruising week, closing near its lows against the euro, but it has managed to recover some of its losses against the US dollar, as attention now shifts to what the Bank of England might do when it meets in just under two weeks at its next rate meeting.       

Commodities

After some sharp declines this week metals prices have rebounded from their lows on the back of a rebounding yuan, with copper, platinum and palladium enjoying an end of week bounce.

Crude oil prices appear to have found a short term base but they are still set to finish lower for the third week in succession. Concerns around oversupply at a time when the Chinese economy is showing signs of slowing have weighed on the price along with pressure from the US for OPEC to boost supply. With US production also at record levels a global trade slowdown could ripple out into lower demand, and with the US President bemoaning current oil price levels it is not beyond the realms of possibility that we could see an SPR release as the Trump administration tries to put a lid on gasoline prices.

Gold prices, after spending most of the week in retreat, have also enjoyed a rebound on the back of President Trump’s comments this afternoon, that the strong US dollar is hurting the US economy.

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