With US markets closed for the Labour day holiday, Asia markets have had a lacklustre and negative start to September, as a raft of new and increased US and China tariffs kicked in over the weekend, with China appearing to adopt a more measured approach to escalating its countermeasures.
August was a disappointing month for equity markets, in contrast to bond markets which saw strong gains in prices as yields fell to record lows in a number of cases, with US yields in particular seeing some of their biggest monthly falls since the financial crisis, with the 10 and 30 year yields both falling by over 50bps.
This investor nervousness could well carry over into September, even though we are starting to see some signs of a pickup in some of the more recent economic data, but with gold prices and a weaker yuan likely to continue to be a dominant theme any upside for equity markets could well be limited, unless we see a significant de-escalation in tension. A lot is likely to hinge on this month’s China, US trade talks if they do take place.
In China the latest manufacturing and services PMI’s for August were somewhat mixed with a modest improvement in services, while the manufacturing surveys showed stagnation either side of 50.
Asia’s rather disappointing session stands in contrast to a positive start for Europe’s markets this morning though this could well change as we look towards Europe’s manufacturing sector where recent flash data has shown some evidence of a modest improvement, albeit from fairly low levels.
The euro slipped below the 1.1000 level last week for the first time in over two years as speculation grows that the ECB will embark on another stimulus plan when it meets in ten days’ time, against a backdrop of a weakening economic outlook, particularly in the manufacturing sector.
The latest manufacturing numbers from Spain, Italy, France and Germany has reinforced this weakness although they have improved from the July numbers, with modest improvements to 48.8, 48.7, 51.1 and 43.5 respectively.
The pound is coming under early pressure over weekend headlines that appear to suggest that a possible election could come sooner rather than later. This week has the potential to be a significant sentiment shifter if MPs succeed in passing legislation that might block a no deal Brexit, with the tug of war inside the Conservative party set to play a key part in determining how the pound fares in what is likely to be a turbulent week.
We also have the added wrinkle of a number of prorogation court cases that are set to be ruled upon in the coming days. An interim injunction has already been rejected with a full hearing tomorrow in Edinburgh to consider the merits of the case. The judge requested a formal affidavit from the PM on oath as to why he needs to suspend parliament. Another case will be heard on Thursday in a case brought by Gina Miller and joined by John Major, with the chances of success seemingly slim.
How the pound reacts to the week’s events is increasingly becoming difficult to gauge, even if the various rebels win a vote to extend article 50, beyond the 31st October. First of all the EU has to grant such a request, and secondly it’s not immediately obvious what the point of another 8 months would be able to do in unlocking the current log jam, a logjam that has paralysed UK politics for the last three years, and merely prolongs the uncertainty of stagnation into next year.
The US dollar has continued to push higher, something that is likely to displease President Trump, but something that he will find very difficult to stop even if the Federal Reserve were to do what he has asked it to do and cut rates by 100bp. The reality is the US dollar remains the best of a very sorry bunch in terms of yield and the strength of the US economy.
In company news AstraZeneca is higher after announcing results from its latest trials of its cardiovascular drug Brilinta. These showed that it reduced the risk of death and heart attack, by 10% compared with aspirin.
Marks and Spencer is also underperforming as it gets set to be relegated out of the FTSE100 in what would be the first time it has never been in the main blue chip index. Having narrowly escaped relegation in the last reshuffle its performance since then appears to have ensured it falls through the trap door since then. In a way a spell out of the spotlight may well do it some good and based on the performance of previous companies that have fallen out of the UK benchmark it hasn’t been too long before they have returned.
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