Markets have had many headlines to focus on in the past 24 hours, including US President Trump’s threat to escalate the trade war with China by imposing tariffs on all US imports from China (worth about $500 per annum), Bank of England Governor Carney’ speech and reports that some ECB board members may favour a slightly less conservative timeline for rate hikes. Moreover, as previously announced, US tariffs of 25% on imports from China worth $34bn per annum will kick in today, as will Chinese tariffs on $34bn of US imports and the British cabinet is scheduled to meet today to thrash out a post-Brexit deal with the EU.
Yet the Euro, Sterling and Dollar are broadly unchanged versus one another and global risk appetite has seemingly found its footing. The S&P 500 is at the same level it was a week ago and Chinese equities, which had been on a steep downtrend since late-May, have been relatively stable in the past four sessions.
The GBP/USD cross briefly spiked to 1.3265 yesterday after Governor Carney said that UK economic growth had rebounded in Q2 and he was more confident about the economy’s outlook. He hinted at a rate hike and markets are now pricing in an 80% probability of a 25bp rate hike at the August policy meeting. Nevertheless Sterling has been unable to maintain those gains versus major currencies, with the Dollar getting some support from robust non-manufacturing ISM and private-sector employment data. The Euro was also underpinned by reports that the ECB may be slightly more hawkish than originally assumed and robust German factory orders and industrial output growth in May.
Markets’ attention is seemingly firmly fixed on today’s meeting of Prime Minister May’s cabinet meeting. The purpose of this gathering at Chequers is for a divided government to finally agree on the broad terms and conditions of the UK’s relationship with the EU once it has left the EU in March 2019 and the agreed transitional phase has ended in December 2020. Key will the be issue of what type of customs union the UK will adopt, with reports in recent days that a third option has been put on the table. But even if the government reaches a common agreement, which is due to be detailed in a White Paper, Theresa May will need to get a green light from the EU before British and EU parliaments vote on a deal later this year. Time is running out and there is arguably still a lot to do and markets are rightly not getting carried away.
