Negativity from the US and China trade war has eased since late August and into early September, but last week produced a positive event with the announcement from China that trade talks would restart in October.
This encouraged a positive shift in outlook for the world economy and across global financial markets with a “risk on” tone seen across asset classes to begin September.
Moreover, the spotlight had already switched to the UK and the ongoing and intensifying Brexit saga. The UK Government had prorogued Parliament the prior week, effectively closing Parliament early and leaving little time for Members of Parliament (MPs) to try to avoid the UK leaving the European Union on a no deal basis on 31st October. MPs, however, were quick to react last week and defeated the Government three times; opposition MPs took control of the agenda in Parliament, passed a bill forcing the Government to ask for an extension for Brexit negotiations until January 2020 (if a deal was not reached in October) and rejected a Government requested general election for October.
This now leave a no deal Brexit far less probable than at the end of August, which reinforced the positive news from the above-mentioned announcement of the resumption of US-China trade talks. This pushed stock markets globally to the upside and saw safe haven assets, like bonds, pushing lower in price.
Furthermore, tensions in Hong Kong that have been impacting negatively on Asian and global risk assets eased last week with the withdrawal of the extradition bill that had previously triggered pro-democracy demonstrations. This also buoyed global share markets.
With these three negative forces easing in pressure, global equity indices have rallied to confirm = intermediate-term technical bases, whilst global bonds sold off to move to higher yields. In addition, the reduction in global geopolitical tensions saw the previously strong US Dollar (as a safe haven) weakening versus most currencies (though the Japanese Yen, the ultimate flight to quality currency, was even weaker).
Turning to macroeconomic data, the start of September has seen many economic indicators in both Asia and Europe worsening. In the US, the Institute of Supply Management Manufacturing Index came in worse than expected, though the Non-Manufacturing Index came in better than expected. Friday’s US Employment report was mixed as well, although the headline Non-Farm Payroll figure was slightly below expectations (though market reaction was muted).
What to Watch
The geopolitical spotlight stays on the UK and the whole Brexit debacle. In addition, although US and China trade tensions have thawed, markets will not rest easy until the trade talks have restarted, and some positive outcome is evident.
As below, the week ahead sees Chinese and UK data of note to start the week, but the significant focus will be from Thursday when we get both German and US CPI, the somewhat key European Central Bank Meeting (with a dovish shift expected). Then finally on Friday see the publication of US Retail Sales and the Michigan Consumer Sentiment Index.
|9th September||Chinese trade data; UK Industrial & Manufacturing Production and GDP|
|10th September||Chinese Consumer Price Index (CPI); UK Employment|
|11th September||US Producer Price Index (PPI)|
|12th September||German (CPI); EU Industrial Production, ECB monetary policy statement/ rate decision; US CPI|
|13th September||US Retails Sales; US Michigan Consumer Sentiment Index|