Equity markets underwent another disappointing session yesterday, as trade tensions once again returned to centre stage. US markets slipped back with the Dow once again finishing lower for the eighth day in a row, while things were no better in Europe with the DAX and FTSEMib bearing the brunt of the declines.

A profits warning from Daimler over the risks of Chinese tariffs sent the auto sector sharply lower, and while the warning had all the hallmarks of management looking to get their excuses in early, especially since Chinese tariffs haven’t even kicked in yet, the warning appeared credible enough to prompt a sharp sell-off across the sector.

Investors are particularly skittish anyway since today the EU’s sanctions against a range of US goods start to kick in, and these could well prompt a counter response from the US, with the European auto sector likely to be next in the firing line, if President Trump remains true to his word.

The sector was unable to garner any support from a proposal by German auto makers for zero tariffs in both directions between the EU and US. This is probably down to the fact that the implementation of any such policy is not in their gift but would be at the discretion of the EU and would probably need approval from all EU members.

The oil and gas sector also saw heavy falls ahead of today’s decision by Opec, where it is widely expected that the cartel will ease its production ceiling and lift supply capacity by between 500k and 1m barrels a day, with a decision expected later today or tomorrow. Iran has already stated that it will oppose any decision to lift production, arguing that Opec shouldn’t be President Trump’s poodle, however given that Russia is in favour and the Saudi’s also seem keen, Iranian objections aren’t likely to prevent a decision to loosen the taps, the only unknown being by how much the cartel intends to increase its output.

Italian markets also fell sharply after the appointment of two Eurosceptic ministers to a key finance committee raising concerns that the new populist government was gearing up for a confrontation with Brussels, with Italian banks the biggest fallers.

There are also concerns about a slowdown in economic activity across the euro area, where it had been widely expected that despite a weak Q1 we would start to see a pickup in Q2. Thus far we haven’t seen that and despite the optimism of the ECB there are concerns that Q2 could be equally disappointing. Manufacturing and services PMI numbers out of France and Germany continued to slip back in April and May, after slipping back in Q1, with services activity in Germany hitting an 18-month low last month.

Today’s flash PMI numbers for June could reinforce these concerns, raising concerns about the wisdom of the ECB’s keenness to rein back its QE program by year end. France manufacturing and services PMI’s are expected to come in at 54 and 54.3 respectively while Germany’s flash numbers are expected to come in at 56.3 and 52.2 respectively.

The Bank of England’s capacity to catch the markets on the hope never fails to surprise. Yesterday’s surprise conversion to the hawk camp by Chief economist Andrew Haldane, he of the August 2016 QE “sledgehammer”, appears to have had a change of heart when it comes to being concerned about the possible risks of inflation, as he joined external MPC members Michael Saunders and Ian McCafferty in pushing for an increase in the level of bank rate.

This unexpected development has helped put a floor under the pound, which hit a seven month low against the US dollar yesterday and which had been in a long steady decline since Governor Carney’s remarks at the IMF in mid-April when he cautioned about taking a May rate hike for granted.

At the risk of being cynical this sudden conversion to the hawkish cause could merely be a case of the Bank looking to try and put in a floor for the pound at a time when the US dollar looks set to sweep away all before it in the coming months. While there has certainly been an improvement in some of the more recent data the sudden shift in stance appears more designed to keep markets from pricing out the possibility that rates won’t rise this year than anything else.

There was also the fact that the decline in the pound in the past few weeks was likely to put significant upward pressure on inflation, which is the last thing the central bank needs having only recently downgraded their inflation forecasts for this year.

Nonetheless the fact that a bank insider, the chief economist believes that rates need to go up has put an August rate rise firmly back in play, while also helping support the pound, though it doesn’t mean for one moment that it will happen.  The bank has played fast and loose with their guidance before, but for the meantime yesterday’s actions should mean that the pound may start to find some support against the US dollar.

EURUSD – managed to hold above the May lows at 1.1510/20 despite making a marginal new 11 month low but needs to move beyond resistance at the 1.1640 area to argue for a move towards the 1.1720/30 area. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.

GBPUSD – found support at trend line support from the 2017 lows rebounding from the 1.3110 area and posting a key day reversal. Having broken back above the 1.3220 area we should now see a retest of the highs this month at 1.3450. A break below 1.3100 opens up a potential move towards 1.2980.

EURGBP – still stuck in the range with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – also appears to be range bound with resistance just below the 111.00 highs and support down near the 109.50 level earlier this week. We could head lower if we break below this area and retest the 108.70 area. While below these recent highs the risk appears to have shifted towards the downside.
 

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