Trading has been thin today with China, Japan, South Korea and South Africa on holiday. Markets’ reaction to the escalating trade war between the US and China has been reasonably subdued, as US tariffs of 10% on a further $200bn of Chinese imports and Chinese tariffs of 5-10% on a further $60bn of US imports officially take effect today. Chinese and European equities had a strong day on Friday, with the Chinese CSI 300 stock index rallying 3% and European equities up for the six consecutive session, and the S&P 500 closed within a fraction of its all time-high. Hong Kong equities are, however, a tad weaker today and the Australian Dollar is down a tad versus the US Dollar. Unsurprisingly a trade meeting between the US and China which had been tentatively scheduled for today has been cancelled and markets are now likely to turn their attention to Wednesday’s Federal Reserve policy meeting.
With a 25bp Fed rate hike to 2.00-2.25% looking like a near certainty, markets will focus on the odds of the Fed hiking rates again in December. Specifically, attention will likely be on the Fed’s updated economic projections, including the 15 FOMC members’ expectations for rate hikes for the rest of 2018 and 2019, and the Fed’s assessment of how the US-China trade war will impact US economic growth and inflation and in turn its policy rate outlook.
Sterling on Friday suffered its largest daily fall against the Dollar in over a year, with the cross slumping below 1.31, after the two-day EU leaders meeting ended on Thursday with the EU executive summarily dismissing British Prime Minister May’s post-Brexit deal. There had been hopes that European Council head Donald Tusk would use this informal meeting of heads of state to give a renewed lease life to UK-EU negotiations ahead of parliamentary votes likely to be held in November. Instead he poured cold water on the odds of the EU agreeing to the plan which Theresa May put forward two months ago, with French President Emmanuel Macron particularly critical of a plan which he argues sees the UK cherry-picking the best bits of EU membership. Prime Minister May was in combative mood on Friday, saying that she would stick to her proposed plan while a number of cabinet members dismissed the idea of early general elections or a second referendum.
Theresa May is in a tough position with time running out and the Labour Party has upped the ante yesterday by saying that while it favoured early elections in the event of the UK and EU failing to reach agreement, it would keep all options on the table including a second referendum. The Labour Party will vote on such a motion, which has the support of Labour leader Jeremy Corbyn and senior party members, at its conference which kicks off in earnest today. The Labour Party’s stance on Brexit is still arguably a little vague but the ruling Conservative Party, which holds its annual conference on 30 September to 3rd October, will be under pressure to show that it can get a good deal with the EU or succumb to rising and political pressure to hold a second referendum. The GBP/USD cross is back up above 1.31 this morning but it’s likely to be a rocky road for Sterling in coming months.
