Blue Monday for markets as trade outlook darkens

The dark mood over global markets returns, on increasing pessimism that a full-blown U.S.-China trade war may be unavoidable.

Summary

The dark mood over global markets returns, on increasing pessimism that a full-blown U.S.-China trade war may be unavoidable.

Ban on China’s U.S. tech buy-ins bites

The latest White House trade restriction against China might be an unprecedented ban of firms, at least 25% Chinese-owned, from investing in “industrially significant” U.S. technology companies. If the Treasury proposals, outlines of which were reported by the Wall Street Journal, are enacted, Beijing would have little choice but to react in kind. That could mean potential clampdowns on U.S. technology firms active in China, from the smallest to the largest. The latter group comprises web-based giants whose shares have underpinned U.S. stock markets for the last two years, including Apple, which derived 8% of revenues in the country in the second quarter after a recent return to quarterly growth there.

Nasdaq negative

Nasdaq September futures are some 40 points lower, pointing to the kind of definitive drop when Wall Street opens that the tech-heavy gauge has largely avoided, even as U.S trade relations progressively worsened. Futures contracts for Dow and S&P 500 indices and FTSE, DAX and STOXX gauges are just as heavy. Sentiment on major Asia-Pacific indices was, numerically at least, slightly worst. The People’s Bank of China’s has gone ahead with the 50 basis-point reserve ratio requirement cut flagged last week, amounting to a $108bn liquidity release, higher than widely expected. The decision by PBoC to make more liquidity available for potential lending to smaller firms than expected shows policymakers are going into damage limitation mode, after China’s stock markets saw their worst week since February.

Dollar drive disrupted again

In line with the pattern of the last few months, risk aversion is limiting any dollar advances from the perceived inflationary input of tighter trade restrictions. The yen is already set for another large safe-haven-seeking rise that could easily match two surges last week, taking the USD/JPY pair back to the edge of two-week lows near 109.20. The dollar’s drop against yen the accounts for much of the weight of the Dollar Index. The gauge manages to eke out an 100-tick or so gain, slightly up from 6-day lows. This also underscores that the currency markets see U.S./EU and UK yield differentials as likely to remain intact in the medium term, despite benchmark Treasury prices reversing to the upside just like bunds and gilts, on further safety-seeking. Both the euro and sterling are over their late-last-week revivals, having retreated before having to take on well-known resistance levels.

Ifo struggles to lift Europe sentiment

There’s a slim possibility that Germany’s monthly Ifo business climate indices could have a similar effect to PMI data did on Friday and take the edge of negative sentiment in European markets. The institute’s Business Climate index was a tenth of a point better than forecast at 101.8, though the Current Conditions gauge was 5 basis points below an expected 105.6. With the weak euro providing little succour for large equities so far, the hurdle for a sustained swing higher on Monday looks a tough one. Furthermore, investors are focused on the main event for this week, the EU Summit beginning on Thursday. Migration will be the key talking point for Germany, and other large continental members, though Brexit will loom large in the minds of all. After Sunday’s mini migration summit failed to produce much impressive consensus, member states are heading into meetings under a cloud created by a growing political crisis in Germany with asylum policy at its heart. Breakthroughs on that and Brexit look like a big ask. There may well be even less cheer for investors to buy come Friday.


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.