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The Recurring Themes: Trade Tensions, EM Stress & Brexit

Trade tension and the prospect of higher borrowing costs in the US prevented any meaningful gains, leading to a mixed close for Wall Street overnight. Whilst the S&P managed to snap a four-day losing streak, closing 0.2% higher, and the Nasdaq moved northwards as the selloff in tech stocks came to a halt; the Dow closed 0.2% lower on the day. The dollar, which has often benefitted from escalating trade war tensions struggled amid a lack of fresh developments.

Emerging market weakness continues to haunt traders with EM currencies continuing to show signs of weakness versus broad dollar strength & prospects of higher interest rates. A broad index of EM currencies dipped to a 16-month low, whilst the Indian Rupee is hovering close to an all-time nadir.

Pound Extends Brexit Gains Overnight

The pound added to gains overnight following a stronger than forecast GDP reading and Brexit optimism after Michel Barnier signalled that a Brexit agreement should be in place in 6-8 weeks. Whilst this is clearly a huge sign of confidence that a Brexit deal will be achieved with Brussels, pound traders haven’t overly committed because there is still a long way to go domestically. Even if Theresa May and Brussels agree on a Brexit deal, this would still need to be pushed through Parliament, which given the current divide, could be a very challenging, if not impossible job.

Brexit developments will remain under the spotlight following Michel Barnier putting the end in sight, but traders will also be looking towards UK average wage growth data. Whilst June’s wage growth was disappointing at best, traders will be hoping that momentum from a series of strong data points could help lift average wage growth for July.

UK Average Earnings in Focus

Expectations are for average weekly earnings to have increased to 2.5% in the three months to July, up from 2.4% in June. Meanwhile, wages excluding bonuses are expected to increase to 2.8% in the three months to July, up from 2.7% in June. However, with inflation in July at 2.5%, it is clear that the squeeze on the consumer is still intense. Investors will be looking for data showing that average weekly earnings are above inflation and that could still be a big ask.

Given a better than expected GDP reading in the previous session, combined with record construction output; a move higher in wages could provide a strong setup for the BoE before they meet on Thursday. Whilst no policy change is expected from the meeting, given that the central bank hiked rates in August, strong data prints and optimism over Brexit could bring more hawks to the table.

The stronger pound ensured the FTSE lagged behind its peers in the previous session, a pattern which is set to repeat itself on the open as the FTSE is looking to open higher, albeit lagging behind its peers.

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