European stocks underwent another disappointing session yesterday sliding to four-month lows as emerging market uncertainty, along with rising trade tensions prompted further declines.

The declines in the emerging markets which started with Argentina and Turkey appear to be spreading across to other markets with Indonesia and South African markets sliding sharply along with their currencies.

We also saw heavy declines in the normally bullet-proof tech sector on concerns that US lawmakers might look to take steps to target the sector for heavier regulation, on concerns over malign interference in the US political process. With both the CEO’s of Facebook and Twitter facing US lawmakers’ investors decided to use this opportunity to embark on a round of profit taking.

US and Canadian negotiators also sat down again to restart further talks with respect to NAFTA ahead of a possible announcement either today or tomorrow that could signal further tariffs on a further $200bn of Chinese goods.

A big jump in the US trade deficit to $50.1bn appears to have convinced markets that the prospect of further tariffs is almost inevitable, given that the gap with China hit yet another record high. The deficit with the EU also rose to a record high, which suggests that it won’t be long before President Trump starts banging that drum again.

Earlier this week the latest ISM manufacturing survey saw the headline number hit a fourteen year high of 61.3 with all the major components showing decent gains. The strength of the number saw the US dollar rise sharply across the board, as well as raising concerns that the US central bank might have to take more aggressive action to curb what might be a US economy that is running too hot.

The strength of the number also prompted comments from Minneapolis Fed President Neel Kashkari that the Fed might be being too aggressive in managing expectations about the pace of future rate rises, and in so doing raising concerns about ripple out effects in emerging markets, which have seen heavy selling in both currencies and stocks in the last few days.

Despite the strength of the ISM numbers it should be noted that it is never wise to place so much emphasis on a single data series, particularly since manufacturing is such a small part of the US economy and the fact the numbers didn’t sync up with a different manufacturing survey which showed a slightly softer reading on the very same day.

Today’s ISM services survey for August could well be slightly more instructive, given its larger size relative to manufacturing as well as the fact that prices pressures don’t appear to be running out of control, even while the labour market remains resilient.

Expectations are for services activity to remain steady with the services PMI expected to remain steady at 55.2, while the ISM services survey is expected to improve from 55.7 to 56.8. The latest ADP employment report is expected to show that 195k new jobs were added in August, down from 219k in July.

In a sign that unit labour costs for the quarter remain unresponsive to a tighter labour market, these are expected to decline 0.9%, unchanged from the previous reading and taking away some of the urgency around the prospect of higher inflation.

The pound had a rollercoaster day on the currency markets yesterday on reports that Germany and the UK had agreed to drop the insistence on details of how a future agreement on economic ties would look and instead focus exclusively on getting the withdrawal agreement out of the door to the exclusion of all else. The report was subsequently denied by the German government who insisted their position had not changed and the pound slid back again, despite a decent services report for August which showed that the UK economy remained on course to march its Q2 rebound.

EURUSD – has found some support just above the 1.1520 area, with the pressure remaining on the downside while below the 1.1630 area. The 1.1750 level remains the bigger resistance level and remains a significant barrier to further gains. Below 1.1500 retargets the 1.1300 lows.

GBPUSD – yesterday’s rebound from 1.2785 has seen the pound head back towards the 1.3000 level with the 50-day MA being a key resistance just above this level. We need a move back above 1.3020 to open up a move towards 1.3170, or we could find ourselves drifting back lower again.

EURGBP – ripped out a few stops above the 0.9040 level but was unable to sustain, with the key reversal day and week still in play. The 0.9040 remains a key level as we look to head back towards the 0.8935 level and last week’s lows. A move through these lows re-opens a move towards 0.8840/50 area.

USDJPY – finding resistance just below the previous highs at 111.80, and the daily Kumo cloud. A break above 112.00 targets a move towards the July peaks at 113.20. While below 111.80 the risk remains for a move towards 110.60 cloud support area. The major support sits back on the 200-day MA at 109.80.

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