Global stock markets had a shocker last week, posting their biggest declines in several weeks, after President Trump threw everyone a curve ball just as US-China trade talks had restarted.

Having spent the last few months fretting about the prospect of a possible escalation after talks broke down in acrimony in May, there was an expectation that now talks had restarted there would be a brief pause while both sides staked out their positions, and reassessed their respective strategies.

As things turned out this proved rather complacent, as in the wake of the Federal Reserve’s Wednesday decision to cut rates by 25 basis points, but hold back on committing to further cuts, the US President decided to announce that he was going to implement 10% tariffs on the remaining $300bn worth of Chinese goods, arriving in the US after the 1st September.

There had been an expectation that President Trump would keep this particular bullet in the chamber, holding it in reserve for later in the year, given the effect it might have on the US economy, which even now continues to outperform the rest of the world, though this could well change in the coming weeks as US consumers start to feel the chill winds of higher prices.

Now the chamber has been emptied, any escalations are likely to come in the form of higher tariff rates, and that’s before we consider the effect of the likely Chinese response, of which we could hear more details this week

As we head into a new week, and a disappointing start to August, the big question is whether last week’s sell-off is a one-off and a buying opportunity, or the start of a much bigger decline.

Judging by the ferocity of the last two day’s sell-off and today’s further declines in Asia, there is a sense that it might be the latter which means we look set to see some further August angst for investors, starting with today’s session in Asia, which has seen further heavy falls and is set to see European markets open sharply lower this morning.

The falls in Asia this morning have also seen the Chinese currency slip through the 7 level for the first time in 11 years, with the People’s Bank of China blaming the escalation in trade tensions, while this morning’s session in Asia markets hasn’t been helped by further unrest in Hong Kong.

Friday’s US payrolls numbers almost became a footnote to events at the end of last week, though they still pointed to a US economy fairly at ease with itself. 164k new jobs were added in July on top of the 156k added in the ADP report, while wages ticked up to 3.2%.

All the while concerns about the recession in global manufacturing is raising concerns about a trickle down into the services sector and today’s latest services PMI’s for July.

Despite the prevailing doom and gloom, the services sector has thus far avoided being dragged down by the woes of the manufacturing sector. That may change in the medium term if there is no evidence of a pick up after a weak first half of the year.

Expectations are for the services sector to continue to outperform however one needs to be mindful of any evidence that we could start to see rising evidence of a slowdown here. This is particularly important in the context of last week’s manufacturing numbers which were awful, and potential escalations in the trade outlook, which has seen the US and China once again lock horns.

This morning’s services numbers are expected to show that Spain, Italy, France and Germany all showed evidence of positive economic activity in July, with readings of 53.6, 50.6, 52.2 and 55.4 respectively.

In the UK the sector is also expected to just about expand, coming in at 50.4, though the blistering hot weather could also have played a part in all Europe’s economies, for better or worse.

The pound also had a difficult week, hitting two-year lows against the US dollar and getting close to similar levels against the euro, as investors fretted about the increasing likelihood of a no deal Brexit, as well as a general election.

We’ve heard more noise over the weekend about the prospect of a possible election over pledges the new UK Prime Minister Boris Johnson is making with respect of hospitals law and order and education. It certainly does feel like an election is coming, however it would still be a surprise to see it happen before 31st October.

EURUSD – found some support last week at the 1.1020 area, but hasn’t as yet managed to push back above the 1.1130 area. While below the 1.1130 area the risk remains for further losses towards 1.0830 on a break below 1.1000. Above 1.1130 retargets the 1.1280.

GBPUSD – made a new two-year low at 1.2080 last week. The risk remains towards the downside with major support at the 1.1980 area. As such it feels a little bit vulnerable to a short squeeze. Needs to move back above the 1.2260 area to prompt further gains back to 1.2380.

EURGBP – 12 weeks of gains has seen the euro push up to the 0.9200, with major resistance at the 0.9300 level. Last week we saw a bearish daily reversal, however there was little in the way of follow through. Nonetheless, while below 0.9200 we could see a move lower on a break below the 0.9080 area.

USDJPY – the failure to overcome the 109.20/30 area last week saw the US dollar plunge sharply falling back below the 108.20 area, and taking out the June lows in the process. A move towards 106.00 looks very much on the cards, while below 107.80.

 

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