Trade tensions were dialled down a little yesterday when the Chinese Ministry of Commerce said the standoff will need to be resolved through additional talks.
Beijing has matched the US’s tough stance, but at least they are acknowledging that dialogue is the best way forward. Both sides know full well that a series of higher levies will be bad for everyone, and that feeling has dripped into the markets. Stocks in Europe and US have ensured sizeable falls since late April and early May, and yesterday traders felt comfortably to buy back into the market in light of the more sensible approach from China.
US markets were given an extra boost from Jerome Powell, the Federal Reserve chief, who said he is ‘monitoring’ the trade situation, and that the US central bank is willing to act in an ‘appropriate’ way in order to help the economy grow. The comments were viewed as a sign the Fed were willing to lower interest rates should it be required ,and that acted as a green light to the buyers. Dealers were happy to hear the Fed are flexible, and that removed some of the recent negative sentiment. Richard Clarida, the vice-chair of the Fed, said the US economy is in a ‘good place’ and it’s the Fed’s job to ensure it stays ‘there’.
There was as twist in the Trump-Mexico spat yesterday, as some Republicans are considering blocking the president’s plan to impose 5% tariffs on all imports from Mexico, on the grounds it would also have a negative impact on the US economy. Mr Trump is known for taking a tough stance, and the tariff threat against Mexico is in relation to boarder security, but it appears that some US lawmakers are seeking to prevent another trade escalation.
The rally in New York prompted buying in Asia overnight even though the Chinese services sector cooled a little. The Caixin survey of Chinese services came in at 52.7 in May, which undershot the 54.3 forecast, and cooled from the 54.5 reading in April.
The US dollar index was largely flat yesterday as the Fed funds futures market are pricing in roughly a 90% chance of a rate cut in September. Some traders feel the markets are getting ahead of themselves, especially in light of Powell’s measured update. US factory orders dropped by 0.8% in October – the sharpest fall since October 2018, and this adds weight to the argument the economy is cooling.
There are problems in the eurozone as headline CPI dropped to 1.2% and the core reading fell to 0.8%, and these imply falling demand. The European Central Bank’s (ECB) meeting is on Thursday and traders will be listening out for more details about the targeted lending programme that will commence in September. The ECB’s inflation target is 2%, and now it is at 1.2% - it’s lowest since April 2018, the central bank might need to take a more aggressive approach.
The services PMI reports for major eurozone countries will be announced between 8.15am (UK time) 8.55am (UK time). The Spanish, Italian, French and Germany updates will be released, and the consensus estimate is 52.5, 49.7, 51.7 and 55 respectively.
The politics of the eurozone could also be a problem. Italy’s Prime Minister, Giuseppe Conte, told the coalition parties to stop fighting or he will quit. A collapse of the Italian government would likely cause havoc in the already fragile Italian debt market. It was reported that Matteo Salvini of the Lega Party, and Luigi Di Maio of the Five Star Movement had a long and cordial chat over the phone, so things might be on the mend.
UK services PMI will be announced at 9.30am (UK time) and dealers are anticipating 50.6.
US ADP employment will be announced at 1.15pm (UK time), and economists are expecting 180,000, which would be a big drop from the 275,000 posted in April. The ISM non-manufacturing report will announced at 3pm (UK time), and the consensus estimate is 55.5.
The oil market appears to have settled down at little in the wake of severe losses, and the Energy Information Administration report will be closely watched by dealers. The US update is tipped to show a 849,000 barrel decline in oil inventories and a 630,000 barrel build in gasoline stockpiles.
EUR/USD – has been broadly pushing lower since early January, and if the negative move continues it might target the 1.1000 area. Resistance might be found at 1.1322.
GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at the 1.2476 region. The 1.2800 area might act as resistance.
EUR/GBP – has rebounded for over three weeks, and if it holds above 0.8800, it might bring 0.8939 into play. A move to the downside might bring the 50-day moving average at 0.8660 into play.
USD/JPY – while it holds below the 100-day moving average at 110.59, its outlook should remain bearish, and support might be found at 107.51. A rally might target the 110.00 region.