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G20 warns on trade risks, as Trump defers Mexico tariffs

G20 warns on trade risks, as Trump defers Mexico tariffs

Last week saw a decent rebound in equity markets, with the weekend G20 finance ministers meeting in Japan, outlining where the main investment risks are primarily centred, particularly around trade and geopolitics. 

The meeting also took aim at the big tech giants of Facebook and Google among others with a pledge to levy new rules that would ensure that they pay more tax as a percentage of their turnover in what would be a significant shakeup of the global tax system.

Markets in Asia started the week on the front foot this morning, carrying on from where US markets left off on Friday, in the wake of the US payrolls number, and after President Trump stepped back from the levying of new Mexican tariffs which were due to start today. The US said that they had reached a deal with the Mexican government to pinch off immigration levels at the US southern border. This in turn is likely to see markets in Europe open higher this morning, while the Mexican peso rebounded. 

To listen to some of the commentary around last week’s US payrolls report you would think the US economy is on the cusp of slowing quite sharply. Sure, the number was disappointing, coming in at 75k jobs, 100k below consensus, and in line with a similarly disappointing ADP number a few days earlier, but to suggest that it makes a September rate cut more likely is stretching things a touch.

This is because bond markets already had a move in September as a high probability in any case, and nothing in the payrolls number last week would suggest that this has become more likely, let alone less likely, with the US 10 year yield closing the week at 2.08%, and the 2 year yield at 1.85%.

These values compare to values of 3.15% and 2.97% respectively a mere 7 months ago in mid-November. With a Fed funds rate of 2.5%, this represents a significant repricing already of US rate expectations, from multiple rate rises in 2019 to multiple rate cuts. Quite simply the data thus far doesn’t support that type of turnaround in rate expectations.

What was slightly more concerning was that wages growth slowed slightly, albeit still at a fairly healthy 3.1%, even as underemployment fell back to 7.1% from 7.3%. The headline unemployment rate remained steady at 3.6%.

Consequently, stock markets rallied into the weekend, with US markets posting their best weekly performance since last November, while European markets rebounded strongly from three-month lows to reverse their losses of the previous week.

One of the reasons behind last week’s strong rebound would also appear to be a significant shift in respect of how markets view the next moves for global central banks, with expectations now moving towards who will be the first to blink when it comes to easing policy and ending the recent bias, towards tighter monetary policy.

On the trade front today’s expected implementation of tariffs was averted at the weekend after President Trump deferred the measures after receiving assurances from the Mexican government that they would take steps to help stem the flow on the US’s southern border. He did, however reserve the right to implement them in the event that Mexico fails to implement the deal to his satisfaction.

As for as the discussions with China are concerned the two parties remain as far apart as ever, and while some Chinese goods now have a two week extension until 15th June until they face the new 25% tariff, concerns are rising that even with a possible meeting between President’s Trump and Xi at the G20 at the end of this month, the impact on global trade already could take several months to reverse.

This week’s Chinese economic data for May is likely to set the tone with some sign that the economy in China picked up post Chinese New Year, though the data has been mixed. After a pickup in March trade activity in April slipped back with exports declining 2.7%. May exports did see a recovery rising 1.1%, beating expectations of a further decline of 3.9%.

Imports in April were more encouraging posting their first positive number on four months, rising 4%, however it would appear that this recovery was short-lived as May carried on the picture of weak domestic demand, by falling 8.5%. Bearing in mind that upcoming trade numbers are likely to be skewed by front running ahead of this month’s tariff increases its debateable how much value can be assigned to these particular numbers, but in the case of imports there does appear to be a trend developing, which suggests that from a domestic point of view the Chinese economy is struggling.

As far as the UK economy is concerned, worries about a slowdown could grow later this morning with the release of the April manufacturing and industrial production numbers. In the lead up to the March Brexit date, economic activity received a boost from some level of stockpiling. As we start Q2 this boost is likely to give way to a tail off which could well be reflected in this morning’s numbers. 

Manufacturing production is expected to decline sharply by 1.4% and industrial production by 1%, with the likelihood of a 0.1% contraction in April GDP. On a rolling quarterly basis that is likely to be reflected in a slight dip from 0.5% to 0.4% in terms of GDP.

EURUSD – pushed above the 1.1270 area last week and looks set for a move towards the 200-day MA at 1.1375. A move through 1.1380 retargets the March highs of 1.1450. A move back below 1.1270 reopens a move back to the 1.1220 area.

GBPUSD – has continued to edge away from the lows at 1.2550 and needs to move back through 1.2770 to open up a return to the 1.2860 area. Interim support should come in at the 1.2660 area.

EURGBP – currently capped at the 0.8900 area, however the main resistance at the 0.8920 area.  The 200-day MA at 0.8780, is the main support and is likely to contain any dips. Below 0.8780 argues for a move back to the 0.8720 area.

USDJPY – has found support at the 107.70/80 area last week with resistance at the 108.70 area. The main resistance lies all the way back towards the 109.30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.

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