European markets firmer but trade and Brexit gnaw at confidence

Morning Note

After a rough August though traders should buckle up for more volatility in September. Trade and tariffs continue to gnaw away at investor confidence. Britain seems destined for a no-deal Brexit.  

First to trade, and we see no chance of a deal soon with the two main protagonists happy to see the dispute escalate. The US and China and are not the only players though in this drama – Japan and South Korea are also doing their best to stoke tensions. We are starting to find out just how bad the impact is on the real economy. 

The US has followed through of course with plans to slap tariffs on additional Chinese goods. Beijing has retaliated. Washington slapped 15% on $112bn of imports from China, which was met by tariffs on $75bn of US goods, including crude oil. 

The outlook does not look positive for a deal any time soon. I continue to stick to the view that Mr Trump will be inclined to wait until 2020 before seeking a meaningful resolution. 

Nevertheless, China’s factory activity bounced back in August, though the broader trend remains downwards as trade tensions and tariffs bite. The Caixin PMI inched into positive territory and a 5-month high. But the official manufacturing survey still shows factory activity contracted for a fourth straight month. Across the rest of Asia, PMIs show manufacturing sectors slipped into contraction in August. This decent Caixin print seems to be about better domestic demand due to stimulus efforts.

Equities – Asia has been mixed to soft. Japan was lower, along with the Hang Seng and ASX. Chinese indices have been firmer. European indices are mildly higher at the start of the new trading month, but gains may be fragile.

The FTSE 100 was flirting with an old flame – the 7240 level. The better China manufacturing PMI sent basic resources higher, boosting the UK blue chip index. Bulls need to see 7290 breached on the upside.

The S&P 500 managed to close higher Friday for its first weekly advance in five. But the rise failed to overcome the August high – in other words we are still in a consolidation pattern, which to my mind looks quite bearish and flaggy. If 2840 goes it could be the big one. Futures indicate weakness today but remember the US is closed for Labor Day, so volumes are going to be thin. 

Brexit – expect fireworks as Parliament returns this week. If the rebels and Remainers want to stop the no-deal Brexit then this is the time. Ringleader Nick Boles has apparently said the plan is to force the government to get an extension beyond October 31st – not exactly enough to get a second referendum in so just more can kicking. Probably futile – no deal increasingly looks the only route.  

If they don’t get their way, the EU may offer a last-minute olive branch; but the chances are slim given their principled approach to the sanctity of the single market and not wanting to throw Ireland away. 

Therefore, we may likely expect elevation in no-deal risks play out this week for cable. GBPUSD has found support around 1.2140 to stop the near-term rot. Bears looking for the 1.210 level to go. Bulls need a recovery to 1.230, last week’s peaks, to be confident. Near term the last swing high from last week comes around 1.22250. 

Elsewhere, the US dollar is a little short of its more than 2-year highs, after renewed euro weakness sent the dollar index to its highest since May 2017. Beware the rising wedge though on the dollar index, which is a good marker for a bearish breakdown. 

This dollar strength is biting into gold, which has come off its highs around $1550 to trade at $1522. As long as $1516 holds now bulls will reasonably confident. The dollar may just be getting close to a top. 

Oil – found support at rising uptrend line from the August 7th low. Having bounced off this around $58.60, crude is mildly firmer and may look to make a fresh tilt at $60. Better Chinese PMI data may support this move.