For most of this year investors had been able to put concerns about the macro economic environment behind them and focussed instead on the prospect of a positive outcome the ongoing US, China trade talks.

In the past two weeks this confidence has taken a knock, as optimism about any sort of deal in the short term has disappeared, as evidence grows that neither side is looking to back down in the short term. This week’s threat by China to restrict rare earth minerals is the latest twist in the dial, given that it controls 35% of the global market. This has meant that equity markets have found further upside much more difficult to sustain, particularly since that Chinese tariffs on $60bn of US goods are set to kick in tomorrow. 

In another unexpected development President Trump announced he would be imposing a tariff of 5% on all Mexican imports from June 10th unless Mexico takes measures to address the immigration crisis at the US, Mexico border. These would increase incrementally if the US is not satisfied with the progress being made, up to a level of 25% by October. This surprise announcement, coming as it does in the wake of the recent new trade agreement USMCA, was completely unexpected and could well upend the whole agreement.

It also makes it much more difficult for countries to take the US at its word when it comes to trade negotiations if its President can so easily lob a hand grenade into the path of an already agreed deal..

This is likely to add further pressure to equity markets this morning, with European markets set to open lower, with the DAX likely to be hardest hit given that the German economy is more highly geared to exports. US markets are also starting to misfire with the result that we look set to see global equities finish lower this week, on top of the losses we saw last week.

We did see a modest rebound for European markets yesterday, which we look set to give back this morning, while the S&P500 found support at its 200-day MA, however this could merely be some month end position adjustment, with stocks set to post their first negative month this year.

Despite all of this it is important to retain a sense of perspective; and it is true that sentiment has taken turn for the worse, but we still remain very much in positive territory for stock markets this year.

There has been some rotation out of stocks into bonds, and the rebound in prices and slide in yields is a concern, however gold prices have remained subdued, which suggests, for now that investors aren’t unduly spooked. This might change however if the US President continues to spook investors by his tendency to announce policy on the hoof by tweet.

If economic data continues to deteriorate, or trade tensions deteriorate further, markets could start to price in further losses. For now stock markets are still above their key technical support levels, however that could change in the coming days.

Another one canary in the coal mine, could be oil prices which slid sharply yesterday, falling to their lowest levels in two months, despite geopolitical concerns over Iran, having risen steadily this year on the back of output cuts from OPEC. A sharp drop in demand could lead to a supply glut if concerns about trade lead to an economic slowdown in the coming months.

Tensions between Italy and the European Union about the Italian budget aren’t helping in terms of investor confidence, however even here investors still see to have decent appetite for Italian debt, if this week’s bond auctions are any guide. The feeling appears to be that the EU Commission is unlikely to censure Italy immediately given that France has been a serial transgressor and to do so could well bring the whole edifice down on their heads, given that Italian Deputy Prime Minister Salvini is spoiling for a fight.  

The EU is also likely to hold back on Italy until a number of key appointments have been filled, particularly since EU Commission President Juncker, European Council President Tusk and ECB President Draghi are all on their way out and need replacing. Any new presidential appointments might want to adopt a different tack to a problem that has the potential to be an existential risk to the whole euro area.  

On the data front the latest Chinese manufacturing and services PMI numbers for May show that the Chinese economy has continued to languish, despite the efforts to stimulate it in the last few months.

The manufacturing sector showed a slowdown from the 50.1 in April, coming in at 49.3, with the employment sub index hitting its weakest level since 2009, while non-manufacturing stayed steady at 54.3.   

EURUSD – the recent lows at 1.1110 remain the main obstacle to a move towards the 1.1000 area. The bias remains for a lower euro while below 1.1270, while we also have resistance at the 1.1230 area.

GBPUSD – slipped below 1.2600 yesterday and looks set for a retest of the lows this year at 1.2430. we need to get back above the high this week, as well as the 1.2765 level to stabilise, and argue for a move back to the 1.2860/70 level.  

EURGBP – continues to find support above the 200-day MA at 0.8780, and while it does so the risk of a move through 0.8850 remains and a test of the 0.8920 area. Below 0.8780 argues for a move back to the 0.8720 area.

USDJPY – the 109.10/20 area has acted as decent support for the last two weeks. While above this key support the risk is for a move back to the cloud resistance level at 110.70 area. A move through 110.80 argues for a move towards the 111.30 area. A move below 109.00 opens up the 108.20/30 area.  

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