Financial market research and analysis

Political turmoil in Washington combined with growing trade tensions sent Wall Street sharply lower overnight. A rumoured resignation from Attorney General Rod Rosenstein, plus US and Chinese trade tariffs kicking in and dampening hope of further trade negotiations fed a negative tone to trading overnight.

Asian markets struggled as investors digested escalated tensions in the next chapter of the growing trade spat. Both sides are digging their feet in, with tariffs being levied. Hope for negotiating a way out of this impasse is declining. The latest market moves highlight just how difficult it is to trade these escalating trade tensions. On the announcement of these latest tariffs, the markets moved higher, given that the tariffs were lower than what traders had been expecting. Fast forward to the application of the “lower” tariffs and the market dives. The markets have tried hard to shrug off the implications of an escalating trade spat on global trade and growth but this is becoming harder with each fresh round of tariffs and will slowly but surely take its toll on investor sentiment.

US equities are also pricing in an expected rate rise by the Fed on Wednesday, at the end of its two-day policy meeting, which kicks off today. A September rate hike by the Fed is 92% priced in by the markets; higher borrowing costs is not a positive factor for US equities to fall back on. In contrast, Japan, for example, has seen a weakening of its currency versus the dollar so despite the escalating trade tensions story at least there is some positivity from a softer yen feeding through supporting the Nikkei.

Oil pauses for breath after 3% rally

Oil is seen easing back in early trade on Tuesday, after surging more than 3% overnight. Brent hit a 4 ½ year high of $81.48 overnight after Saudi Arabia and Russia dismissed President Trump’s latest call for cheaper oil prices. By ruling out any production increases, the OPEC leader and its biggest oil-producing partner outside of OPEC are providing a solid support to the price of oil, which could help it trend higher over the coming weeks. Russia and Saudi Arabia essentially ignoring Trump’s pleas, combined with US sanctions hitting Iran’s oil exports in early November means we expect fresh multi-year highs for oil, which will also help the oil majors such as BP and Shell to gain ground in the near term.

Will US consumer confidence data weigh on dollar strength?

In the FX market, increased trade tensions plus an expected rate rise on Wednesday have boosted flows into the dollar. The euro has eased back from 3 ½ month highs versus the greenback following unusually hawkish comments from Draghi. The pound has also given back some of the gains from the previous session although continues to find support at $1.31 despite little tangible progress in Brexit discussions.

US consumer confidence could add some pressure to the rising dollar, with sentiment expected to slip slightly in September. Higher inflation and the expected impact of the escalating trade tensions on prices could dampen consumer confidence, which is expected to tick down to 132, from 133.4 in August.

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