At the end of my previous article, just last Monday, I said the markets would be especially
sensitive to whatever the next headline delivered on the US/China or Brexit fronts and so far
this week that has indeed played out. The news that China is planning on retaliating to the
latest US trade tariffs certainly had an impact as did the news that the UK cross party talks
aren’t exactly going swimmingly well.
So, with the Tories set to get hammered in the upcoming European elections next week the
knives are again being sharpened for Teresa May. Indeed, I believe she is due to meet with
the 1922 committee today as it looks increasingly like there’s little chance of any cross party
agreement with Labour now. Naturally, none of this has been lost on the poor old pound
which fell back through support around 1.2860-80 versus the dollar yesterday and is yet to
rebound back past that level this morning and if anything looks like setting fresh interim
lows as I write.
As far as China is concerned the impact of their threats sent the equity markets lower again
with a positive impact on the JPY too as that gained ground across the board- most notably
versus the GBP. The GBPJPY looks like it could very shortly have a test of the 140 handle- not
something its done for quite some time now.
Briefly elsewhere, overnight a rather disappointing unemployment report from down under
sent the AUDUSD lower again. Given what I told you previously about the stops in place at
0.6900 on that one, I hope it comes as little surprise to note those were duly removed after
that employment news hit the wires. As to whether or not the AUD can now rebound is still
uncertain and very much linked to what next emerges, not just on the China/US front, but
also with upcoming Chinese data.
Fresh political concerns are mounting on the Italian political front too which is having an
impact on the German Bund/Italian BTP spread which has continued to widen this week.
Indeed, such has been the demand for German debt that the yields on Bunds have
surpassed those of Japan in terms of negative territory. However, this is not quite as one-
dimensional as one might think and I shall explain why I think that is the case.
It looks increasingly possible that the PBOC are already switching reserves out of dollars and
into the EUR, and more especially it would seem into German bunds. In fact, according to
‘semi-official’ Chinese media reports the government is threatening to dump its more than
$1 trillion of US treasury holdings. This would indeed, be a hugely significant move if it ever
came to pass.
However, that’s not something that could ever be done overnight and would take a
considerable amount of time to unwind and finding a home for that kind of size would not
be easy either. Irrespective of that, the latest moves in Bunds this week coupled with news
out of China this morning, that the government reduced its holdings of USTs in March by
over $10 billion, would suggest that it might already be underway. Indeed, if that is the case
then it would certainly also explain the resilience of the EURUSD in refusing to break lower
towards 1.10 when by all other matrix it should have done so.
Hence this is definitely something to keep a very close eye on in my view, even if in the
meantime the 1.1160-1.1260 range persists. The fact that the EURUSD has held its ground
at the same time as the GBPUSD has fallen back is also partly attributable to fresh GBP
outflow on the cross. The GBPEUR which had lifted close to 1.18 is back down again and
under fresh pressure as it falls through 1.15 this time- currently near its recent lows as I
write- around 1.1440.
I keep reminding you that I’m in no rush to get back into the equity markets and nothing I
have seen so far this week has given me any reason to change that stance. However, its
always wise to keep an open mind on all this. That I will certainly continue to do, especially
as I am more than aware that the whole vista could so easily change.
Personally, I have my doubts that it will, but it’s nevertheless why I’m paying especially close
attention to the headlines this week. This is always vital from a trading/investing
perspective anyway, but particularly so just now – hence the reference to that in today’s
headline.
So, with that in mind, the news yesterday afternoon, that Trump is apparently set to delay
any tariff implementation on EU and Japanese car imports by up to six months certainly
gave the markets a boost. The EURUSD jumped on the news as did all the major equity
markets. Perhaps I should just point out that this is not confirmed yet, but it would certainly
make good sense for Trump not to try and fight a trade war on too many fronts at once.
Important Economic Releases Due This Week
17/05- 3.00pm US April Leading Index
17/05- 3.00pm US- May University of Michigan Consumer Sentiment Index