Anyone trying to determine the next move in stock markets in the last 24 hours would be justified in feeling like they’ve just experienced a bit of whiplash.

A sharp move lower in the wake of a less dovish than expected move by the Federal Reserve on Wednesday was quickly reversed in early US trading after some weak manufacturing and construction data, raised the prospect that for all the coolness about pre-committing to a pre-set rate path, the Federal Reserve would soon be compelled to soften its tone, sending the S&P500 well back over the 3,000 level.

This rebound was soon scuppered by President Trump when he announced that he had decided to levy 10% tariffs on the remaining $300bn of Chinese goods from September 1st, sending markets straight back lower again.

It is not hard to underestimate how much this abrupt escalation has caught markets unawares. After the deadlock over the summer, there was optimism that once China and the US sat down there would at least be a short period of a ceasefire while both sides restated their respective positions.

Unfortunately, President Trump doesn’t operate to a specific type of playbook, and yesterday’s actions, while reckless and likely to backfire horribly, could well give the President the weaker US dollar he clearly wants. They certainly put further downward pressure on bond yields, as well as the US dollar, however they also saw stock markets and oil prices tank, something the President probably didn’t want, and as a result we can expect to see a much lower open for European markets, more than wiping out the modest gains of yesterday.

The new tariffs are doubly difficult for Germany, whose manufacturing sector has been in recession all year, and is especially export dependent. Faced with the prospect of more trade disruption and a European Central Bank short on remedies, Europe could be facing an existential crisis before the end of the year.

For all the weakness in the global manufacturing sector, which now appears to be starting to infect the US manufacturing sector, there is still a silver lining with services which are, thus far, still holding up fairly well, along with consumer confidence.

The US jobs market is also showing few signs of slowing, which makes today’s July payrolls report all the more important, particularly in light of Wednesday’s Fed decision.

A good number would vindicate the Fed’s cautious stance, while a lousy number would cast doubt on it.

The expectation for today’s jobs report is for the US economy to have added 165k new jobs in July, down from the 224k in June, and in line with the 156k new jobs added in the ADP report on Wednesday.

The unemployment rate is expected to remain steady at 3.7%, while wages growth is expected to improve to 3.2% from 3.1%. Improving wages at a time when inflation is subdued is great news for consumers, but will present a problem for the central bank, which needs to hit a 2% inflation target and is currently falling short of it.

Even with a good number, last night’s escalation by the US President has muddied the waters with respect to the normal reaction function of the market. Amidst all of this uncertainty there is no guarantee that a good number might be positive if investors perceive that it might push the Fed away from cutting rates sooner rather than later.

Global yields are sinking sharply, with the German 10-year bund at -0.46%, another record low, while US 10-year yields sunk to 1.91%, and US 2-year yields dropped to 1.75%.

Gold prices unsurprisingly exploded to the upside, trading in a $46 range, making a nine day low and high in the same session.

The pound has stabilised somewhat after a rollercoaster few days, and after the Bank of England left monetary policy unchanged. The latest inflation report downgraded growth and inflation expectations, however the bank didn’t lay out any forecasts for what might lie ahead in the event of a “no deal Brexit”.

There was some criticism directed at Governor Carney for this, however it isn’t too hard to see why he was reluctant to indulge in this type of war gaming. It is certain that the Bank does have plans if financial conditions deteriorate, however any response will largely be dictated by the fiscal response of EU governments, the UK government as well as the ECB. Any plan that was laid out wouldn’t last much beyond initial first contact and to outline possible responses beforehand could well see the bank criticised for propagating “project fear”.

It’s no wonder Governor Carney decided to keep any plans under wraps.

EURUSD – has found some support at the 1.1020 area, but needs to get back above the 1.1130 area to stabilise. 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 – briefly pushed below the 1.2100 area, making a new two-year low at 1.2080, in the process before snapping back. Still has major support at 1.1980 so 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 – a sharp pullback from the 0.9200 level after several days of gains could signal a bearish reversal, which could see the euro slide back towards 0.9030 initially, and even head back towards the 0.8930 area. The 0.9300 area remains a key resistance level.

USDJPY – the failure to overcome the 109.20/30 area has seen the US dollar slide back, dropping back below the 108.20 area, and keeping the prospect of a move back to the 106.00 area, very much on the table.

 

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