Even the pros at Disney might have trouble thinking up and depicting the delicate rise and fall of emotions between China’s Xi Jinping and the States’ Donald Trump. Following this weekend’s summit, we’re closer to the resolve, the closing credits and watching the fully grown man in the back row pretending he has allergies… he wasn’t crying. But markets are at risk of overpricing the resolve. We’re nowhere near there yet!
The median consensus was that progress would be made in the form of a ceasefire and commitment to not escalate the tariff war any further. That’s exactly what we got. Trump’s explicit concession aimed towards Huawei was an undoubted bonus but not one that investors should read too much into.
So far, markets haven’t and the reaction has been limited. Therefore, rest assured that from next week, the FX universe will once again be central banks; central banks; central banks! Even last night, the cut in rates from the Reserve Bank of Australia to record lows has brought the global monetary agenda back to the foreground. The US Dollar didn’t unwind a great deal of defensive demand yesterday and only the polar opposites of the risk spectrum registered any serious movement. Equities enjoyed a strong rally yesterday as investors’ appetite for risk increased following the niceties in Osaka and gold has fallen from its record high positioning in the days ahead of the event. The progress on trade improved expectations for global economic activity as the probability of resolution on tariffs ratcheted higher.
European leaders too appeared to make progress of their own. Sideline talks allowed the two Eurozone ‘heavyweights’ of France and Germany to suggest and discuss permutations of the future leaders of their institutions. Positions up for grabs this time around include the Commission, Council, European Parliament, and European Central Bank presidencies, and the position of high representative for foreign policy. Let’s get frank. I don’t personally think any of the presidencies bar the Bank mean much. The commission has a monopoly on legislative proposal and its presidency probably has the greatest influence but regardless, the appointments of each member state cannot afford the President anything like the unilateral power associated with his/her title. The parliament is all but powerless and the Council president will have to contend with 28/7 heads of state and do so as their junior. Markets will care who, as ECB President Draghi finishes his term while further rate cut expectations are baked into the dove-pie of European monetary policy, will take control of the monetary scene. As usual, the fight over national fiefdoms will be fierce and two contenders from, you guessed it, Germany and France are neck and neck at the front.
The sun may be shining across the United Kingdom today but a shadow over the economy is being cast by economic data. Factory output soft data, a key indicator of economic growth, registered at 49.4 for June. What does that mean? Well, it means that more than 50% of businesses, whose managers participated in the survey, reported declining output versus the previous period. The fall manifested in the weakest reading since late October in a sign that Brexit and global trade uncertainty is battering the shores of British industry.
Part of the effect is an unwinding of fresh production in favour of utilising the stock pile of goods that manufacturers created to protect themselves against a hard Brexit in the first half of the year. The volatility in Sterling generated by erratic economic data is contributing to a lack of appetite for the Pound particularly given the status its already attributed with as the untradeable currency. On the data front, US jobs data this Friday will be crucial. With unemployment at a 50 year low in the US, the Fed is struggling to justify the interest rate cut this month that the market is screaming for. Any sign of labour market cooling will give the green light to the Fed, consolidating interest rate cut expectations to the detriment of the Dollar and delight of equities.
Discussion and Analysis by Charles Porter