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Once again, the previous week saw traders focused on the unfolding developments of the global trade war. Whilst a slowing of trade war headlines at the end of the week enabled equities to pick up, it was a matter of too little too late, resulting in weekly losses for the majority of major indices.
A ramping up of trade war headlines over the weekend, such as a strong warning of retaliation from the EU and a potential currency war with China (US), will ensure that the fear of an all out global trade war is central in trader’s mind, as the session begins on Monday. Markets have a tendency to normalise risk events that hang around long enough, which could explain the fairly limited moves on the market so far this morning.
Asian markets were subdued on the open, and European bourses are pointing to a lower start. Whilst a weaker pound will offer some support to the FTSE, a decline in the price of oil as Saudi Arabia comes under pressure to up production, combined with an expected fall in mining stocks on the back of weaker Chinese manufacturing data, means the FTSE could struggle to go anywhere but southwards.
Fortunately, there is a packed economic calendar this week which may go some way to distracting the markets from the growing friction between the US and the rest of the world and the damage that it could do to global trade and the relevant country’s economies.
UK Manufacturing PMI to send GBP/USD to $1.31?
The previous manufacturing PMI indicated a slight acceleration of activity, bouncing back in May to 54.4, after dipping to 53.9 in April. However, given the increase was principally down to inventory building, rather than a response to new demand a surprise to the upside this month is looking unlikely. Expectations are for the pmi to have dipped to 54. With manufacturing in April showing its biggest slowdown in 5 years, we are not holding our breath for an impressive figure this morning.
The pound is already under pressure at the start of the week; soft pmi data could send sterling back towards $1.31.
Merkel’s Deal or No deal?
The euro has kicked off the new week on the back foot, declining versus the dollar in early trade, as concerns in Germany have surfaced over the acceptance of the EU Summit’s immigration deal. Whilst on Friday the deal looked like a life line to Merkel, who was under significant domestic pressure to find a solution to the migrant crisis; by Sunday evening this lifeline had been whipped away and elevated political risk ensued. The German Interior Minister and Chair of the CSU (the party whose support is needed by Merkel in her fragile coalition government), not only rejecting the deal, but then also offering to step down has added an additional layer of uncertainty to the already fragile German coalition.
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