Having hit multi month lows two weeks ago markets in Europe enjoyed their second successive weekly gain last week, despite the implementation of another set of tariffs on $200 billion worth of Chinese goods by the US administration, which are due to start today.
It would appear that the fact that the tariffs were set at 10% as opposed to 25% initially has tempered market concerns of a sharp deterioration in relations between Chinses and US officials after China responded fairly modestly with 5-10% tariffs on only $60 billion worth of US goods in return.
While that may have more to do with the fact that China’s imports from the US much less than the other way around it would appear that the markets have taken solace in the belief that China’s response has been slightly more temperate than had originally been feared.
This rather naïve belief, that an escalation has been delayed, looks set to be tested in the coming days after China announced at the weekend that it was pulling out from all future trade talks with the US in the wake of the recent decision to impose economic sanctions on a number of Chinses officials in response to the purchase by China of SU-35 Russian combat aircraft and SAM missile systems in the last 12 months. It also doesn’t take into account that the US could impose similar tariffs on the remaining $267 billion of Chinese products that are currently excluded from the tariffs round.
It would appear that Chinese officials have realized that any progress on trade id unlikely to happen before that US mid-term are out of the way in November, an unsurprising decision given how events have played out in the last week or so.
This week’s focus away from the trade story is likely to be on this weeks Fed meeting which starts tomorrow and the outlook for US rates beyond this week’s likely increase in the upper of the Fed funds rate to 2.25%.
In light of the weekend events Europe’s market look set to open slightly lower, against a backdrop of concerns about a slowdown in some of the latest economic indicators across Europe. Last week’s French manufacturing and services flash PMI’s showed a French economy that continues to slow, and while Germany services was ok, the manufacturing sector was disappointing.
Today’s German IFO business survey for September is expected to show a deterioration in German business sentiment from the five-month high of 103.8 that we saw in August with slowdown to 103.20, as the deterioration rhetoric in the face of threats of possible US tariffs on the auto sector, and the political impasse over Brexit sours the mood, amongst German businesses.
The pound had a dreadful week last week despite hitting a two-month high against the US dollar. The breakdown in relations between the UK and EU leaders in Salzburg last week, and Prime Minister Theresa May’s punchy statement on Friday could well be described as the usual political theater that we have all become accustomed to in the past couple of years, however markets appear to be deciding that with the March 2019 deadline looming, the room for political manoeuvre appears to be getting smaller.
This had led to the not unreasonable conclusion that the risks of political, as well economic dislocation have increased, particularly since both the UK government, and so-called opposition parties appear to be more concerned about their own internal squabbles, than actually doing is best for the people they claim to represent.
With party conferenced season now in full swing there is likely to be little of consequence that is likely to be construed as positive for sterling, as both Labour this week, and Conservative’s nest week look to shore up their base support, with equally economically incoherent policies.