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August has been a remarkable month so far for US equities. Apple became the first trillion-dollar company, the S&P reached a remarkable milestone, touching a fresh intraday high and today this current bull run will break a record for its duration.
Yet despite the numerous records and positive close on Wall Street, Asian markets and European futures moved lower, tracing US futures lower, in response to heightened US political risk. In a catastrophic day for President Trump, his personal lawyer Michael Cohen pleaded guilty, possibly implicating the US President on legal issues and Trump campaign chairman Paul Manafort was also convicted; events which have understandably unnerved investors. The overriding fear here is that something could come out linked to Trump. US domestic political issues are in danger of overshadowing the revival of the US- Chinese trade talks, which had been highlighted as the principal risk event on Wednesday.
Investors will be watching the outcome of the US-Chinese trade negotiations closely, with headlines having the potential to move the markets. Whilst investors have been relatively optimistic that a positive outcome will be secured from the meeting, neither the US or China are optimistic that the talks can succeed, where three earlier rounds have failed.
With expectations sitting so low, just the slightest hint of good news could be enough to ignite risk appetite. At the bare minimum, the two sides will need to be walking away from this meeting agreeing to more talks. This would at least boost hopes that the trade tariffs due to be applied at the end of this month will be put on hold. Under this scenario, we would expect to see the US dollar gain versus the Japanese Yen and the broader US equity market to resume its charge higher, on its way to a record bull run. Should the two sides fail to even agree to further talks, we could see the S&P drop sharply away from its record high and flows into safe-haven currencies such as the yen increase.
Brexit talks; deal in sight?The pound climbed 0.8% in the previous session pushing above $1.29 in its biggest daily jump in a month. An impressive budget surplus plus some faint signs of optimism in Brexit talks, combined with a weaker dollar catapulted the pound higher. Michel Barnier’s comments that Brexit negotiations have reached the final stages and that the two sides will now participate in continuous negotiations from here on, in addition to UK Brexit Secretary Dominic Raab suggesting that a deal could be on the table by October 18th has boosted demand for sterling. With no high impacting UK releases for the remainder of the week, pound traders are expected to watch Brexit developments, potentially seeing the pound push back above $1.30. Should the pound continue to push higher, the FTSE could find itself under further pressure.
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