Having spent most of this year rallying on the prospect that China/US trade talks would yield some form of compromise agreement, investors experienced a bit of a reality check over the weekend after President Trump raised the prospect that tariffs on $200bn of Chinese goods would increase to 25% this Friday, from their current levels of 10%, while also raising the prospect of further levies on a further $325bn worth of Chinese goods in the near future.

These tariffs were supposed to come into force at the beginning of March, but were deferred in order to keep alive the prospect of an agreement taking shape, after initial early progress. This weekend’s events would appear to suggest that for all the early optimism the final stages of any agreement still appear to have some way to go.

It also bodes ill for the prospect of speedy progress on any future trade talks between the EU and US, and this raising of tension saw stock markets initially fall back sharply off over the holiday weekend, with European markets dropping sharply yesterday, mainly led by the sectors most exposed to rising trade tensions, with the auto sector bearing the brunt.

Yesterday’s sell-off was in contrast to the positive finish seen at the end of last week which saw European markets finish at their highest levels in over six months, and the S&P 500 close at a record high, as better-than-expected earnings numbers raised the prospect of further solids gains in the coming weeks. Friday’s US non-farm payrolls report saw US unemployment hit a 50-year low, as the headline numbers added 263,000 jobs, while wage growth remained steady at 3.2%.

This is very much a 'goldilocks' scenario for the Federal Reserve as it keeps the prospect of them remaining on hold, against a backdrop of subdued price pressures.

Against this type of backdrop, it would appear that even with a Presidential election looming in just over a years’ time President Trump feels confident enough in the resilience of the US economy to up the ante and increase the pressure on China to agree to a deal as the clock ticks down on 2019, and a delegation of Chinese officials arrive in Washington this week for further discussions.

While European markets had a poor start to the week, US markets also fell back sharply, though they did spend most of the day pulling back from the lows of the day. Despite the late pullback for US markets we still look set for a negative open for European stocks, with the FTSE 100 also opening lower as it looks to play catch up, having missed out on yesterday’s fun and games.

The reason for the pullback from the initial low points of yesterday would appear to be a belief that President Trump’s threats are just bluster, borne out of frustration at the slow progress being made, and an attempt to force further progress when Chinese officials arrive in Washington later this week for the latest round of talks.

That assumption is likely to be tested sooner rather than later, and the initial optimism that Trump’s truculence was bluster was tempered somewhat by trade representative Robert Lighthizer’s claims that China had backpedalled on certain elements on what had already been agreed. China is still set to send a trade delegation to Washington this week though sentiment could well be dictated by the size and seniority of the delegates sent by Beijing, with speculation that the group of trade officials may be smaller than originally planned.

China won’t want to be seen to be influenced by this weekend’s events, however if this week’s China trade numbers for April don’t show some signs of improvement then the pressure on the Chinese government to deliver on further compromises is only likely to grow, along with the prospect of further stimulus measures.

The pound came under pressure yesterday on pessimism that any deal that might be struck between the government and the Labour party would in all likelihood not make it out of the starting blocks, such is the opposition to one on both sides of the Brexit divide.

Talk that Prime Minister May is moving towards some form of customs deal that could satisfy the Labour leadership has been growing in the past few days, however any deal still has to satisfy the so called “sniff” test and won’t change the mathematics in the House of Commons. Let’s not forget that votes on some form of customs partnership has been defeated on more than one occasion by way of indicative votes in the past few months. 

EUR/USD – solid support at the 1.1110 level has seen the euro rebound somewhat but the scope for further gains appears limited to the 1.1230 area for now. Bias remains to the downside while below the upper 1.1325/40 resistance area, with the potential for a move towards the 1.1000 level.

GBP/USD – found support at the 1.2980 level last week before rebounding to the 1.3180 area. Still in a broad range, looking toppy anywhere close to the 1.3200 area and support just above 1.2800.

EUR/GBP – also appears to be range trading for now with support near the 0.8480 area, with solid resistance just above the 0.8620 level.

USD/JPY – having failed to move above the 112.00 level last week the US dollar has slipped back finding some support at the 110.20 area. While this level holds, we could see a move back to the 111.20 level.


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