European markets firmer but trade and Brexit gnaw at confidence
After a rough August though traders should buckle
up for more volatility in September. Trade and tariffs continue
to gnaw away at investor confidence. Britain seems destined for a no-deal
First to trade, and we see no chance of a deal soon with
the two main protagonists happy to see the dispute escalate. The US and China and are not the only
players though in this drama – Japan and South Korea are also doing their best
to stoke tensions. We are starting to find out just how bad the impact is on
the real economy.
The US has followed through of course with plans to slap
tariffs on additional Chinese goods. Beijing has retaliated. Washington
slapped 15% on $112bn of imports from China, which was met by tariffs on $75bn
of US goods, including crude oil.
The outlook does not look positive for a deal any time
soon. I continue to stick to the view that Mr Trump will be inclined to wait
until 2020 before seeking a meaningful resolution.
Nevertheless, China’s factory activity bounced back in
August, though the broader trend remains downwards as trade tensions and
tariffs bite. The Caixin PMI inched into positive territory and a 5-month
high. But the official manufacturing survey still shows factory activity
contracted for a fourth straight month. Across the rest of Asia, PMIs show manufacturing sectors
slipped into contraction in August. This decent
Caixin print seems to be about better domestic demand due to stimulus efforts.
Equities – Asia has been mixed to soft. Japan was
lower, along with the Hang Seng and ASX. Chinese indices have been
firmer. European indices are mildly higher at the start of the new trading
month, but gains may be fragile.
The FTSE 100 was
flirting with an old flame – the 7240 level. The better China manufacturing PMI
sent basic resources higher, boosting the UK blue chip index. Bulls need
to see 7290 breached on the upside.
The S&P 500
managed to close higher Friday for its first weekly advance in five. But
the rise failed to overcome the August high – in other words we are still in a
consolidation pattern, which to my mind looks quite bearish and flaggy. If 2840
goes it could be the big one. Futures indicate weakness today but remember the
US is closed for Labor Day, so volumes are going to be thin.
Brexit – expect fireworks as Parliament
returns this week. If the rebels and Remainers want to stop the no-deal Brexit then
this is the time. Ringleader Nick Boles has apparently said the plan is to
force the government to get an extension beyond October 31st –
not exactly enough to get a second referendum in so just more can kicking.
Probably futile – no deal increasingly looks the only route.
If they don’t get their way, the EU may offer a
last-minute olive branch; but the chances are slim given their
principled approach to the sanctity of the single market and not wanting
to throw Ireland away.
Therefore, we may likely expect elevation in no-deal risks
play out this week for cable. GBPUSD has found support around
1.2140 to stop the near-term rot. Bears looking for the 1.210 level to go.
Bulls need a recovery to 1.230, last week’s peaks, to be confident. Near
term the last swing high from last week comes around 1.22250.
Elsewhere, the US dollar is a little short of its more
than 2-year highs, after renewed euro weakness sent the dollar index to its
highest since May 2017. Beware the rising wedge though on the dollar
index, which is a good marker for a bearish breakdown.
This dollar strength is biting into gold, which has
come off its highs around $1550 to trade at $1522. As long as $1516
holds now bulls will reasonably confident. The dollar may just be
getting close to a top.
Oil – found support at rising uptrend line from
the August 7th low.
Having bounced off this around $58.60, crude is mildly firmer and may look
to make a fresh tilt at $60. Better Chinese PMI data may support this