Market Brief: trade worries haunt markets once again

04 June 2018

The third round of trade negotiations between the US and China over the weekend in Beijing ended unsuccessfully.

Today's data releases
  Key levels
    Support Resistance
10:00 EU PPI
GBP/USD 1.3285 1.3550
15:00 US durable goods GBP/EUR 1.1198 1.1517

Market overview

Happy Monday everyone, I hope you enjoyed the sun and had a relaxing weekend. The third round of trade negotiations between the US and China over the weekend in Beijing ended unsuccessfully with China warning that should the US press ahead with its threat to impose tariffs on $50bn of Chinese imports, it would rescind its offers made in previous rounds. Meanwhile of course the US has raised tariffs of steel and aluminium imported from the EU, Canada and Mexico. These actions came under fire at the meeting of G7 Finance Ministers in Canada with the six non US members urging ‘decisive action’ to resolve the situation. This issue will be discussed further at the end of the week when G7 leaders meet.
 
European political fears were the highlight of last week. The apparent collapse of the attempt by the Five Star Movement and the League to form an Italian coalition government opened the possibility of new elections. On top of this was the fear that the Eurosceptic League, which had been gaining in opinion polls, would campaign on an overt anti-euro message in the new election. However, the panic quickly subsided from Wednesday onwards after FSM and the League returned to the negotiating table and finally formed a coalition government on Friday.
 
We saw an upbeat report with a 223k non-farm payroll gain, delivering a beat on the 190k consensus (Investec forecast 190k). Revisions to job gains over the past two months were also positive, up 15k. Further gloss came from the drop in the unemployment rate to 3.8%, its lowest level since April 2000. Hourly earnings figures were slightly stronger than expected with a 0.3% rise on the month (consensus +0.2%) pushing the year-on-year increase in pay growth up to 2.7% from 2.6% last month. One question for the Fed has been whether the participation rate might start to rise as more working age people re-join the workforce as the labour market tightens, taking some of the steam out of pay growth pressures as hiring becomes trickier. The report actually showed the participation rate edge down to 62.7%; broadly there is little evidence over recent months of a clear shift in participation. Given this, and the solid shape of Friday’s report overall, it is likely that the Fed will be content to press ahead with a 25bp hike in the Federal funds target rate range, at the 13 June meeting (to 1.75-2.00%). Also seeing these figures as reinforcing normalisation momentum on the FOMC, the dollar rose and US Treasury yields edged up further.

In the UK manufacturing PMI rose slightly from 53.9 to 54.4 in May, whilst expectations had been for a fall to 53.5 (Investec 53.5). Despite the headline improvement there are some more downbeat elements in the detail of the survey. In particular the headline was boosted by the biggest build-up of finished goods inventories in the history of the survey. Growth of incoming new business remained solid in May, but the pace of expansion eased to an 11 month low, whilst the pace of job creation in the manufacturing sector also reportedly lost momentum in May. At the time sterling only moved a little higher from its pre PMI position, with investors perhaps unsure whether to be reassured by the headline beat on consensus or the more downbeat survey detail. But it has since rallied and is currently trading at $1.3370 and €1.1425.

Thought of the day

The Investec Derby Festival at the weekend was a sun-filled affair that in typical fashion was graced by Her Majesty the Queen and numerous glamorous race-goers. After 41 years of being a horse owner in the UK, Sheik Mohammed finally won the Derby with 16-1 outsider Masar, a homebred colt, at the  239th Investec Derby. For those in the know, the race was supposed to be a walk in the park for the 4-5 favourite Saxon Warrior, but at no stage did the firm favourite ever threaten, finishing a distant fourth and leaving many punters with big holes in their pocket books. When it comes to currencies, it seemed a sure bet that GBPUSD was going to kick on from the 1.4377 post Brexit high set just over a month ago – yet here we are 10 cents lower (akin to a massive upset in the world of horse racing.) Please speak to your Investec dealer today to get their views on the current state of play. Whilst we are not qualified to help you with your horse racing tips, there are certainly a few pointers we could make you aware of in currency markets!

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