Stock market relief keeps Washington in focus

On guard

U.S. shares are set to join the most uniform global stock market rally of the week, though investors can be expected to scrutinise commentary and other types of mood music from top trade and Treasury officials in Washington and Beijing, ever more intently. The broad swell of optimistic sentiment across global shares since Wednesday afternoon reflects solid hopes. Perhaps, more solid than warranted. Any reassessment of midweek buying premises could be problematic not too far down the line for continued interest in ‘riskier’ assets. As things stand, there’s little doubt negotiations of some import will be scheduled in coming weeks. Following the U.S. Treasury Secretary’s announcement on Wednesday that an invitation had been sent, China followed with its own conciliatory gesture on Friday. China’s top foreign ministry official said in a briefing: “We do not believe that the current system is perfect and without flaws." It’s worth remembering that Beijing has consistently backed that multilateral system, with WTO at the core. And China has repeatedly reminded Washington that retaliation—for instance to the looming $200bn in more tariffs —would be near automatic. The White House’s Economic Council chief, Larry Kudlow, has also been keen to manage expectations: “I guarantee nothing”. Despite late-week relief, we expect markets to remain guarded.

Metals upswing carries Europe stocks

A two-week high in London copper prices underpins Europe. It supports London’s base metal miners. Firmer progress by gold too, rising into a seam opened by dollar weakness. This does suggest precious metals price recovery may be somewhat dependent on how long the greenback tarries though. Uncoiling consumer cyclical tensions are also detectible in the FTSE. Reckitt Benckiser, Kingfisher, DCC, TUI, BT and others are near the top of the benchmark, even as sterling – admittedly a dwindling drag of late – holds near six-week highs. Brexit hopes are in the air. Europe’s own trade hopes are also in the air.  The lightening rod of White House trade ire in Europe, cars and parts, leads the continent’s reaction to trade anticipation. Basic resource shares are predictably next strongest. Monday’s meeting between trade commissioner Cecilia Malmstrom and White House trade representative Robert Lighthizer produced a potential November date for a partial deal. Malmstrom later noted that “lots of work remains this autumn”. 

Currencies calmer

Currency markets are buoyed whilst safe haven trades reverse as several flashpoints beyond U.S.-China trade calm down: Brexit, NAFTA, EMFX (after Turkey’s CBRT grasped the nettle). With mere hours left for news flow to complicate matters, chart factors are a focus. Technicals are by no means lacking the optimism of fundamentals. Sterling (last at $1.3090) even has a chance to cross its 100-day moving average (DMA) for the first since April, a staging post to the next likely serious barrier of July rejection highs just under $1.33. The proximity raises stakes for UK inflation and Retail Sales for August, coming next week. Central banks also appear to have stood aside from further euro progress. It beat cable to the punch with the 100-DMA challenge, also for the first time in around five months. It makes sense that the yen has been sold across the board. But ‘risk-on’ lifting USD/JPY is just as cogent. The target is the week’s high at 112.07, where profit taking emerged ahead of Tokyo’s long weekend.

U.S. Retail Sales up next

The U.S. Retail Sales series appears to have been discounted rather less recently, compared to recent history, as a possible legitimate cross-asset influence. Waves are likely on Friday. The less volatile ex-autos monthly number is seen growing 0.5% for August, after rising by a tenth more in July. Most importantly, another relatively stable print has positive implications for forthcoming Q3 GDP.  There are dollar implications for major currencies seeing relief this week.