The recent gains in equity markets over the past few weeks have been predicated on one particular outcome, that of the US and China arriving at some form of thaw when it comes to relations on trade.
Putting to one side how many times we’ve heard this before, it's always instructive in how markets tend to react with optimism that the two protagonists will eventually arrive at some form of positive outcome.
The reality is that the positive outcome generally gets pushed out to a date somewhere in the future. Let’s not forget that as long ago as June we were told that a US-China trade deal was 90% of the way there, and yet since then we’ve seen new tariffs applied to Chinese goods, albeit with some exemptions, with a new set of tariffs still expected to kick in on 15 December.
Talk of a phased rollback of tariffs in the last few days, which had helped to drive US markets to new record highs and European markets to new multi-month peaks, appears to have given way to the realisation that a deal may be slightly further away than originally believed. Well, 'quelle surprise', I bet no one saw that coming!
The importance of getting some sort of deal was illustrated this morning by way of the latest Chinese retail sales and industrial production data for October, which came in much worse than expected after seeing a bit of a recovery in September. As dead cat bounces go, the inability to sustain the September rebound in economic activity is quite worrying. Industrial production slid sharply to 4.7% from 5.8%, while retail sales came in at 7.2%, both missing expectations sharply, and giving up most if not all of their recovery from disappointing numbers in August.
Earlier this week, President Trump was widely expected to signal that tariffs on European cars might well get delayed, however he passed up the opportunity to do so, lambasting EU trade practices in the process, though a decision on these will need to be taken later today.
Reports last night that US-China talks had hit a snag on the specifics of agricultural purchases also pointed to the difficulties in trying to square the circle of an agreement, and this particular area was supposed to be the easy bit, with intellectual property and other more thorny issues pushed into a phase two.
We were told a few weeks ago that a phase one deal was close, and would be signed soon, and yet here we are still finding problems around soybean and pork purchases, particularly in terms of the actual amounts. And so the theatre goes on, with a deal unlikely to be signed off any time soon.
That being said, investors don’t appear to mind too much, with only a modest decline for European stocks yesterday, while the Dow once again made a new record high. This looks set to translate into a positive European open this morning.
It’s been a busy week for UK data, and by and large it’s not painted that bad a picture of how the economy is doing. There is no question that there are weaknesses, not least in manufacturing and construction, and while Brexit concerns aren’t helping, the wider global outlook isn’t that much better. Against that backdrop the UK consumer has managed to remain fairly resilient despite high levels of political uncertainty, as well as rising concerns about job security, as businesses struggle to maintain their margins.
Fortunately, the unemployment rate has stayed near multi year lows and while wage growth appears to be slowing, inflationary pressures are also subdued. Yesterday’s CPI numbers for October showed a sharp fall to 1.5%, welcome news for consumers, who are benefitting from an almost 2% pay rise in real terms, at a time when the UK’s future relationship with the EU remains unresolved, coming up to 9 months after we were supposed to have left.
Consumer spending has been a bit of a patchwork quilt when it comes to how resilient the UK consumer currently is. Depending on the survey it has either been uniformly negative, or cautiously positive. Footfall has certainly seen significant declines as online shopping grows in popularity, and as far as the retail jobs market that is likely to continue to be a concern heading into year end, as retailers gear up for one of their most important periods of the year.
Retail sales for October are expected to show a gain of 0.2% after a subdued Q3 for UK consumer spending. On an annualised basis that equates to a 3.7% rise, a big jump from 3.1% in September, and could well be a precursor to further gains in November as Black Friday sales start and the lead-up to Christmas.
EURUSD – bias towards the downside remains while below the 1.1050 area, with resistance also at the 1.1100 area. The risk remains for a move towards the 1.0980 level, with a break opening up a return to the October lows of 1.0880. Broader resistance can be found at the 1.1180 area and 200-day MA.
GBPUSD – support remains just above 1.2760 but we need to push back above the 1.2980 area to sustain a move higher. The resistance at the 1.3000 area is a problem in the short term. The 200-day MA at 1.2680 is a big support level and while above it the scenario remains bullish for 1.3200.
EURGBP – another marginal new low yesterday as the euro continues to sink lower. Resistance remains near the 0.8670 area. We still need to see a sustained break below the 0.8570 level to open up the potential for a move towards the 0.8410 area and the lows this year.
USDJPY – the failure to move back above the 109.20/30 area opens up the prospect of a move towards trend line support at 108.40, from the lows in August. Resistance still sits up near the 109.80 area, though the bigger level is likely to be found at the 110.20 area. This is trend line resistance from the 2018 highs at 114.75.