Global markets acclimatise to turbulence

Summary

Markets are weathering trade war turbulence with increasing poise.

Calm again

Our expectation that a lower element of surprise could limit stock volatility is playing out to an extent. After all, the main unknown before the White House published details of new duties on $200bn Chinese imports was the products to be targeted, not the imposition itself. Beijing’s pattern of restrained language, and, typically a pause before announcing retaliation, also helps contain negative reactions on Shanghai and Shenzhen bourses. As such, key indices there have quickly rebounded about 2% a piece, largely matched by South Korea’s KOSPI, whilst Tokyo’s Nikkei, Sydney’s ASX and Hong Kong’s Hang Seng also took back all or most prior session losses.

S&P nears July gain

European indices are firm so far and U.S. futures contracts project further progress there as well. Cross-Atlantic markets can thereby continue to outpace Asia-Pacific counterparts even as trade tensions rise. (For instance, China’s CSI300 is down about 10% over a month vs. a 3% fall by Germany’s DAX). Steadier APAC indices though create a more plausible backdrop for cross-Atlantic gauges to eke out gains for the month. The U.S.’s S&P 500 is set to be first – particularly if Friday’s raft of Big Bank earnings are as robust as expected. Wall Street’s benchmark is down half a percentage point in July. The FTSE 100 was 1.7% offside at Wednesday’s close and Germany’s DAX 3 percentage points from flat for the month. Any phase of progressively lower turbulence could be limited though. If, or when Beijing hits back, downdrafts will cap markets everywhere. And gyrations will linger as longer-term damage to supply chains and the resulting dent to world growth become clearer.

Firm ground for dollar gains

The People’s Bank of China again set the midpoint of the yuan’s onshore and offshore trading range at a higher notch than expected, another signal. The central bank is backing recent statements that it aims to keep yuan and markets stable and calm. Whilst these have not necessarily dispelled speculation that it would ultimately favour a soft yuan, a steadying effect remains evident. The dollar needs this stability for underlying yield and liquidity advantages against emerging market and commodity-linked currencies to come through, though the easier overall mood also takes the heat off the euro—as does talk of a divided and hence more hawkish governing council. Short covering still accounts for much of the single currency’s rise though, particularly against the yen; and this could soon fade. Broader dollar strength should soon cap rallies much beyond $1.1680 too. Greenback pressure on the yen is the market’s current litmus test of real-time dollar direction. Wednesday’s rally was extending at last look, already well established on the 112-yen handle. The wider risk-on signal as the yen retreats will come in handy as the dollar grind extends further.

Watch U.S. CPI, Whitepaper, Trump

The next inflection point for the greenback will come from Thursday’s U.S. inflation data, which the market will treat as Tier-1 plus. The all-important core reading is expected to show price growth is still hot, inching steadily forward at the spring/summer’s 0.2% pace in June, for an annualised acceleration of 2.3% from 2.2% in May. The dollar’s stop-start progress could shift firmly to the ‘stop’ position in the event of disappointment. Downing Street’s publication of its Brexit white paper should see just as much attention as U.S. inflation, though it may be less informative for the near term. With sterling lighter footed after PM Theresa May prevailed over rebels and survived their departure, perhaps the outline need only match previous indications of its content and offer no shocks for the pound to keep a bid, 60 pips at the time of writing. Trump is the wild card. He arrives in London and further bewildering headlines, like those about Russian influence on Germany, could ensue. Market participants are learning how to filter out such noise, but there’s always a chance it could move stocks or currencies, even if fleetingly.