Volatility remains low as US-China trade in focus

CMC Markets

It was a quiet day on the financial markets yesterday as a lack of major news brought about low volatility. 

The next phase of the US-China trade talks will resume on Thursday, but already it seems that expectations have been managed to the downside. It was reported the Chinese government don’t want to make concessions on subsidies as well as industrial policy, so a major breakthrough is unlikely to be achieved.

The fact that both sides are due to meet is seen as positive step, and just because Beijing are not willing to alter their position on certain topics, don’t mean that progress can’t be made in other areas. There is chatter that China might take a tougher line on the US given that President Trump is under pressure due to the Ukrainian related impeachment inquiry. On the other hand the US president might adopt a more conciliatory tone with regards to trade as way of dragging the spotlight from the impeachment talk.

US equity markets finished slightly in the red yesterday after they spent time in both negative and positive territory. The solid US non-farm payrolls report on Friday has still managed to quell the fear that the US economy is going down a gear. Last week we saw the ISM manufacturing reading fall to a ten year low, while the non-manufacturing reading cooled to a three year, which speaker fears about the health of the US economy. The broadly positive jobs report shifted the dial back towards a more optimistic view. Aspects of the US economy are weaker, but how worried should you be when the unemployment rate is at a fifty year low.

Overnight, the Caxin survey of Chinese services was released, and the reading came in at 51.3, while economists were expecting it to hold steady at 52.1. The update was a seven month low, but nonetheless, equity markets in Asia gained ground as the US-China trade talks are in focus.

Fears about the health of the German economy continue to grow in light of yesterday’s weak factory order announcement. The report showed that orders dropped by 0.6% in August, which undershot the -0.3% forecast. The announcement adds weights to the argument the largest economy in Europe is slowing down, so to the recession speculation is likely to continue to circulate.          

Unrest in Iraq – one of the largest producers in OPEC, has contributed to a move a move higher in oil. The country is the second-largest producer in the oil cartel, hence why the troubles in the country have sparked concerns about supply.         

At 7am (UK time) Germany will reveal the latest industrial output report. The consensus estimate is for a decline of 0.1%, which would be an improvement on the 0.6% drop registered in July.

US PPI and core PPI will be posted at 1.30pm (UK time) and the readings are expected to be 1.8% and 2.3% respectively. The updates will give us a gauge of demand at the factory level. The PPI rate could often forewarns us about potential changes in CPI as demand changes at the factory could trickle down to the consumer level.      

EUR/USD – remains in the wider bearish trend, and if the negative move continues it might target 1.0800. A snap back might encounter resistance in the 1.1100 area.  

GBP/USD – has been pushing lower for over one week, but if it holds the 50-day moving average at 1.2251 could pave the way for 1.2600 to be retested. A move to the downside might bring 1.2200 into play.   

EUR/GBP – while it holds above the 200-day moving average at 0.8833 the outlook should remain bullish, and 0.9000 might act as resistance. A break below 0.8786, might put 0.8724 on the radar. 

USD/JPY – since mid-September it has turned lower, and while it holds below the 50-day moving average at 106.99, the bearish move might continue, which could pave the way for 106.00 to be retested. 108.47 might act as resistance to a positive move.