European open – Trade war, CNY, UK, GBP

Trade war fears weigh on markets

Last week did nothing to ease investor anxieties about the global economic outlook and time has not been a healer over the weekend.

Source – Thomson Reuters Eikon

European markets opened more than 1% lower on Monday, continuing the slump from Asia overnight as traders fret about what US dollar rising above 7 against the Chinese yuan means for the economy and trade war.

This level has been protected for a long time by the Chinese who fear the consequences of rapid capital outflows and have spent large amounts of reserves to keep the currency just below. It seems they’re now prepared to relax this policy after the US ramped up the trade war last week, slapping a 10% tariff on $300 billion of imports from the start of next month.

This unintended consequence of the new tariffs will undoubtedly infuriate Trump who has accused China of currency manipulation in the past, even though this is effectively a case of them manipulating it less as market pressures grow.

The timing of the move will spark speculation that this is being done intentionally as a counter-measure against US tariffs, which could cool relations further and make negotiations that much tougher. We now await Trump’s response which I imagine will come via Twitter shortly.

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Sterling slips as Carney issues further no-deal warnings

Sterling is heading south again at the start of the week as traders struggle to get on board with the optimistic message Boris and his team are trying to convey and instead focus on consequences of a no-deal Brexit. Carney was back in the Brexit spotlight after warning about the immediate economic shock of no-deal, which has been labelled once again as project fear.

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While Iain Duncan Smith’s comments may resonate with a number of Brexiteers, it seems people in the markets are very much in camp Carney and believe the risks are real. Of course, it’s very much in Duncan Smith’s interest to play down any negative side affects of no-deal while Carney’s warnings and investors’ reaction come without any knowledge of what the fiscal response will be. Still, it’s good to see we haven’t moved on from this nonsense after three years.

The pound looks set to remain under pressure for now though. There’s plenty of UK data out this week, starting with the July Services PMI today and ending with second quarter growth data on Friday. Unfortunately, I fear anyone hoping for some reprieve from the data this week may be disappointed.

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