While US markets managed to finish higher yesterday on the back of the announcement of the new tripartite USMCA trade deal that is set to replace the old NAFTA trade deal between the US, Canada and Mexico, it was perhaps notable that neither the Dow or S&P500 were able to move above their September record highs.

More interestingly the Russell 2000 slid back sharply continuing a divergence that has been in place for a couple of weeks now.

While there appears to be some discussion as to whether the new deal is a significant improvement on the old NAFTA deal, the fact remains that this appears to be one less problem for investors to worry about for the time being, even if the steel and aluminium tariffs look set to remain in place in the short term.

The prospect of a clearer outlook for the Canadian economy also helped boost the Canadian dollar and in so doing removed a significant cloud, making it much more likely that the Bank of Canada might raise rates when it meets later this month, though a poor jobs report on Friday could undermine that expectation.

The downside, if there is one, is that the apparent resolution of one problem usually opens up another front, and President Trump went on to aim a few barbs towards the EU, as well as China, at his press conference yesterday, with no signs of a resolution on the China question, after reports that US defence secretary James Mattis was cancelling his trip to China later this month. This appears to have weighed on markets in Asia, as Hong Kong shares slid back, though on the plus side the Nikkei continues to remain well supported.

European markets underwent a mixed start to the week and Q3 yesterday with fairly decent gains for the German DAX, however the FTSEMib remained under pressure as political rhetoric out of Italy with respect to the recent budget pointed to the prospect of a showdown with the EU, as well as concerns about possible downgrades in the coming weeks. This uncertainty along with weakness in Asia looks set to weigh on European markets this morning with a lower open expected.

Comments from Italy’s deputy Prime Minister Luigi Di Maio that a ratings downgrade would show prejudice to Italy and that EU institutions were creating market “terrorism” saw Italian yields spike higher, to their highest levels this year, and this verbal toing and froing between Italy and Brussels is likely to keep investors a little cautious of piling back into Italian assets. Finance minister Giovanni Tria is likely to have his hands full at today’s ECOFIN meeting of European finance ministers.

The FTSE100 also struggled, weighed down by a number of profit downgrades.

The euro struggled to make headway as a result of the ongoing political discourse coming out of Italy, while weaker than expected manufacturing PMI numbers raised concern that the economic slowdown that was supposed to be temporary, was starting to become more entrenched.  

The pound underwent a turbulent session yesterday, as the Conservative party conference got underway. Reports that the UK government was considering a new compromise on the Irish border saw the pound push sharply higher, on hopes that a solution to this particularly vexatious problem is coming closer.

On the data front the latest UK manufacturing survey jumped to a four-month high on the back of a rebound in output and new export orders, after a slowdown in August. Prices on both input costs and output charges also showed no signs of slowing down, raising concerns that inflation remains fairly well underpinned.

Today’s construction PMI for September isn’t expected to improve after a sharp drop in August to 52.9, with an expectation that it will remain unchanged. This places even more importance on tomorrow’s services PMI in the context of being able to sustain the rebound that we saw in Q2, and a positive number here will raise hopes that Q3 will come in at or around the same level of 0.4% GDP growth that we saw in Q2.

Oil prices continued their relentless march higher with US WTI as well as Brent prices hitting their highest levels since 2014, with the prospect that further gains could well exacerbate an already weakening global growth outlook.

IMF head Christine Lagarde warned yesterday that the fund was likely to be downgrading its global growth outlook in the coming days, and its hard to argue that an oil price that could be heading towards $90 a barrel at a time when economic activity is slowing, is conducive to a strong growth picture. If anything, it will act as a pinch on consumer spending and could well choke it off altogether if it moves towards $100.

EURUSD – remains under pressure with the September lows the next key support at 1.1520. A move below 1.1500 opens up a retest of the August lows at 1.1300. We need a move back above 1.1690 to stabilise and a return towards the 1.1750 area.

GBPUSD – finding it difficult to hold onto gains, with a rally to 1.3115 yesterday, but is still holding above support at the 50-day MA at 1.2990. This lack of conviction means the pound remains vulnerable, with a break lower arguing for a return to the 1.2870 area. We need to see a move back through 1.3220 to argue for a return to the 1.3300 area.

EURGBP – currently holding on to support just above the 100-day MA. A move below the September lows at 0.8845 could well see further losses. Resistance comes in at the 0.8940 area with the bigger level remaining back at 0.9040.

USDJPY – moved up through the 113.20 level and the highest levels this year bringing the prospect of a move towards the November 2017 peaks at 114.73. Support now comes in at the 112 60 area and below that at 111.80.

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