While US markets slid back from their record highs of earlier this week they still look set to close out yet another positive month. The sweet spot of a US economy that appears to be on cruise control and the prospect of an agreement on NAFTA in the coming days has helped drive further gains this week, though fresh concerns over an escalation with China on reports that President Trump wants to up the ante with a further $200bn of tariffs as early as next month, did prompt a lower close yesterday.

Even though the threat of these new tariffs is nothing new, the apparent lack of reluctance in looking to escalate the current dispute along with further threats by President Trump to withdraw from the World Trade Organisation “if they don’t shape up” has led to increasing investor reluctance to commit new money into global equities, as another disappointing Asia session looks set to weigh further on European stocks at the open.

It’s not been plain sailing for markets in Europe this month where we look set to see a disappointing August performance, despite yesterday’s offer from the EU to remove all tariffs on cars if the US reciprocates. While this would address the US complaint of unequal treatment on car imports and exports, it also raises rather awkward questions on the 25% US tariff on pickup trucks imported from the EU. Whether the US will be as eager to lower this tariff is open to question given the fact that this would open up the US pickup truck market to much stiffer competition. We didn’t have to wait too long for our answer as President Trump pushed back on the proposal, saying it wasn’t good enough. He went on to day that the EU was almost as bad as China on trade, only smaller.

The share price reaction of European automakers yesterday to these reports was fairly telling, with little or no positive change on the day, suggesting that investors remain fairly cautious about any prospect of some form of agreement in the near term, a wise choice given Trump’s subsequent rejection of the proposal.

Turmoil in emerging markets hasn’t exactly helped sentiment either with sharp declines across the board with the Argentine Peso, leading the way with sharp declines also in the Turkish lira, as the short-term measures taken a few weeks ago to support the lira slowly lose their effectiveness.

In an attempt to stem the declines Argentine 7-day rates were jacked up from 45% to 60% in an attempt to defend the currency, and prevent even higher rates of inflation, currently above 30%, while the Turkish lira headed back towards its record lows of earlier this month.  

The Brazilian Real, South African rand and Indian rupee also fell back sharply, as concerns over increasing trade dislocations and rising US rates prompt a further tightening of US dollar liquidity, amidst worries over a contagion effect.

Yesterday’s latest US core PCE inflation data gave no indication of a softening of price pressure, coming in as expected at 2%, though we are starting to see in the latest housing data that higher rates are starting to weigh on home sales. Today’s EU CPI numbers are expected to show that the ECB remains some way from even contemplating a move up in interest rates with the latest flash estimate for August, which is expected to show prices steady at 2.1%, with core prices a full 1% lower at 1.1%.

One other thing to be aware of is the possible downgrading of Italy’s credit rating or outlook by Fitch later today, with markets already pricing in the prospect of a move as Italian yields moved up to four year highs. If this were to happen we could see further downgrades from other ratings agencies, which would then trigger downgrades to Italian banks as well further down the line.

EURUSD – the 1.1750 level has once again proved to be a significant barrier to further gains, as the euro drifted back from levels that have capped since early July. This failure could well see a move back towards the 1.1500 area, by way of support at 1.1620.

GBPUSD – the recent rebound has run into resistance at the 50-day MA at 1.3045. A move through 1.3070 is needed to reopen a move towards 1.3175. Below 1.2950 reopens a move back to the 1.2850 level.

EURGBP – having hit a one-year peak earlier this week, just shy of 0.9100, we’ve seen a sharp pullback with a key reversal day which suggests the potential for further gains losses towards 0.8920 and the July lows at 0.8860/70.

USDJPY – fallen just shy of the 112.00 area keeping the US dollar in a range. A move lower has support at the 110.90 area. The major support sits back on the 200-day MA at 109.80.

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