Trade tensions ad nauseum, Brexit ad infinitum

Morning Note

Markets are focused on US-China relations at the start of the week following a report Friday that the US would consider banning Chinese listings on US markets as part of the trade war. 

The S&P 500 closed half a percent lower on Friday at 2961 but a little off the lows of the day. The report was subsequently denied by a US Treasury official but mud sticks. Shares in Alibaba and JD.Com were down over 5%.

“The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time.” The implicit warning from this statement is obvious.

So we have another salvo on the US-China front. Yet more noise to contend with. This fits into the playbook of Trump negotiations – float something to ramp pressure and get a reaction. Always put the opposition on the back foot. Refuted or not, the implication of this is two-fold: first that the trade/tech war is spiralling ever wider in its scope; secondly it does not bode especially well for the high level talks due to restart Oct 10th. 

One last thing – it makes perfect sense. Why try to bash China with tariffs etc and simultaneously let their biggest firms tap American investors for funds? Globalisation delenda est…

A thought which takes us neatly to Brexit – the Tory conference provides the back drop for the next scenes. Talk of a vote of confidence in the PM is doing the rounds. If that happens, the Opposition have 14 days to come up with a workable administration. What are the chances of Corbyn, Swinson and Blackford all rallying round? Hard to say, but I feel there is too much division there to make it work (sorry, Margaret Beckett). What chance Boris would get his election? Clear headline risk for the pound – but we would assume barring some terrible miscalculation that the Opposition parties would not do anything that risks parliament being dissolved in time for the PM to allow a no-deal Brexit by default. Ball still in Boris’s court for now and in the run up to the European summit in mid-October.

GBPUSD remains on the back foot at a little under 1.23 and testing the 50-day moving average around 1.2260. Bears will eye the lower end of the recent range, the multi-year lows around 1.19. Bulls have a fairly high bar to clear at 1.25. CFTC figures show speculators have again trimmed their short positions.

Meanwhile the euro is just about holding and the rally off the lows on Friday suggests the bulls are defending this. As flagged on Friday the euro was on the verge of breaking having made fresh two-year lows on EURUSD. Whilst the 1.09 level held, the banging on the Sep 3/12 lows at 1.09250 produced a result as the pair made a fresh low at 1.09040. The next risk event is the EZ inflation data on tap tomorrow – market expectations for inflation remain subdued. There seems little hope that inflation will start to tick higher and give the ECB some breathing space.

Elsewhere, Chinese manufacturing PMIs show the trade war is biting. The official gauge shrank for a fifth straight month. The Caixin survey was also released and showed a slight improvement in September, although this seems to be down to domestic demand, bolstered by stimulus measures, as overseas demand is being hit by tariffs. 

Asia has been mixed as investors digest the possible implications of the mooted US listings ban. 

Overnight data also showed New Zealand business confidence at a decade low, further evidence that the trade war is being felt beyond the shores of China and impacting the global economy. This does not bode well for the RBNZ, which may seek to cut more aggressively in the near term than markets had anticipated. Hence we saw the NZD come off sharply, with NZDUSD sinking to fresh 4-year lows at 0.6250.

European shares have got off to a weaker start but we may expect a touch of a pullback the market seeks to consolidate the gains made last week. The FTSE 100 has retreated a touch to around 7420, but UK equities are outperforming their European peers this morning with the DAX and CAC both down 0.2% at send time. Markets still fishing around, but we have had a clear break for the FTSE in the last week, whilst the DAX is coming off its recent run up.

Oil is squeezing lower still and bears have nearly filled the gap. Hovering around $55.80 on the open we’re only a dollar from closing the gap to the close before the Saudi attacks, but we’re holding north of Friday’s low. CFTC figs show speculators have slightly trimmed net long positions.

Gold has a bearish look about as prices look to be hovering around key support and on the neckline of the head and shoulders – prices have retreated south of $1500 and dropped below the 50-day moving average – looking for the $1480-4 region to hold now. If this goes we could get a big move lower. However this consolidation may be a necessary pullback ahead of another charge. Speculators have increased net long positions to 312k from 282k in the last week.