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Markets remain under pressure as China trade concerns increase

European markets underwent further declines yesterday, despite confirmation that China’s deputy premier Liu He would be attending the latest round of trade negotiations later this week. The FTSE100 saw the biggest falls, though its declines need to be set in the context of having to play catch-up having been closed on Monday.

It would appear that the prospect of higher tariffs, which now look inevitable, and the prospect of further escalations, as well as weakness in the outlook for the European economy has sapped investor enthusiasm for equities at current valuations, sending the Stoxx600 to a five-week low.

Sentiment also hasn’t been helped by a fairly sombre and pessimistic outlook for the Eurozone economy from the EU Commissions latest economic projections for the region.

Of particular note was the Commissions pessimism on the German economy which it forecast to grow at a rate of 0.5% this year. The Commission was also downbeat on Italy with growth of 0.1% expected for 2019.

The Commissions predictions for fiscal deficits for this year were of slightly greater interest with both France and Italy both showing spending well outside EU spending thresholds. While a lot of the noise about spending limits has been focussed on Italy’s spending plans with estimates of -2.5% of GDP, increasing to 3.5% next year, it is France’s numbers that could act as a lightning rod for this year. The EU estimates that France’s deficit will come in at -3.1% above EU mandated limits.

It is true that France can argue that GDP growth of 1.3% and lower debt levels mean it has better fiscal headroom, however the optics are likely to be seized upon by the Italian government if the EU comes down on them and doesn’t also cite the French government for its overspend.

US markets also underwent another turbulent session with the S&P500 crashing below the 2,900 level, closing at a one month low in the process.

Asia markets have picked up where the US left off, falling back sharply, with the added distraction of the latest China trade data for April, which was a bit of a mixed bag.

The most recent set of China trade data for March were a little bit of a mixed bag after the weakness of the February numbers. There was an improvement in the exports numbers which came in with a rise of 14.2%, well above expectations of 6.5% and a vast improvement on the 20.7% decline in February. Imports on the other hand were a disappointment declining 7.6%, missing expectations of a rise of 5.6%, and while they were better than the February numbers, they remained in the red.

This morning’s April numbers were a bit of a surprise when they were released because while they showed that external demand was a little weaker, as exports declined 2.7%, a sharp slowdown from the 14.2% seen in March, imports showed their first positive number in four months, rising 10.3%, well above expectations of a 3% decline.

What the numbers appear to show is that March may well have been no more than a post lunar new year rebound, rather than anything more pronounced. As a result of the surprise jump in imports the surplus has come down, unfortunately for China the trade surplus with the US rose to $21bn, reflecting the stronger US economy, something that President Trump might want to reflect on.

More encouragingly for Chinese authorities, the rise in imports would appear to suggest that internal demand is showing early signs of picking up.

It shouldn’t be forgotten that the volatility of the last two days may well have also been partially been driven by excessive short bets on the VIX, which investors are now scrambling to cover. The lack of recent volatility saw record short positions build up on the VIX at the end of April, proving once again that some investors have short memories when it comes to one sided bets. This complacency is all the more astonishing when you consider the last big volatility inspired rout of February last year which saw the S&P500 drop over 250 points in the space of a fortnight, prompting some huge losses for some hedge funds.

Further volatility could well precipitate further losses for stock markets especially if President Trump follows through on his promise to levy additional tariffs at the end of this week.

Yesterday the UK government finally confirmed something that we already knew was probably going to happen, that being the European elections would be taking place on 23rd May.

Despite this truth the government and Labour opposition seem content to continue the charade of cross-party talks in the hope that the optics of talking about the detail of an agreement will somehow convince people that a deal remains probable. It doesn’t convince simply due to the mathematics of getting a deal through Parliament, and is more about who to blame when talks do eventually break down. The pound appears to be ambivalent to events for the moment, still broadly treading water in the hope of some form of progress.

EURUSD – solid support at the 1.1110 level has seen the euro rebound somewhat but the scope for further gains appears limited to the 1.1230 area for now. Bias remains to the downside while below the upper 1.1325/40 resistance area, with the potential for a move towards the 1.1000 level.

GBPUSD – found support at the 1.2980 level last week before rebounding to the 1.3180 area. Still in a broad range, looking toppy anywhere close to the 1.3200 area and support just above 1.2800.

EURGBP – also appears to be range trading for now with support near the 0.8480 area, with solid resistance just above the 0.8620 level.

USDJPY – having failed to move above the 112.00 level last week the US dollar has slipped back finding some support at the 110.20 area. While this level holds, we could see a move back to the 111.20 level.


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