Just after midnight last night the US president announced that he was placing a 5% tariff on all Mexican goods unless the country did something to stem the number of illegal emigrants crossing the US border. He also stated that he will increase that month by month from July 1st to as much as 25% by 1stOctober if Mexico fails to stem the flow.
The markets reacted swiftly and the major global equity futures all fell sharply on the news.
As I write this update at around 5.30am the losses haven’t seemingly gotten worse yet despite the news that the Chinese manufacturing index fell more than expected to 49.4 from 50.1 in April. Granted the markets were expecting this to come in lower, but only to 49.9 from the previous April level of 50.1.
However, given that this is the last trading day of the month, I would be surprised if we do not post some significant losses come the close tonight. I suppose at this point I should repeat what I have said many times previously in recent weeks/months; that I am not buying stocks and remain totally un-invested. Certainly nothing that I see evolving around me this week makes me inclined in the slightest to change that view.
Despite the relatively modest losses thus far, the news from China and Trump has impacted the JPY, which is higher heading into the European opening and that’s entirely consistent with a risk averse scenario developing. The USDJPY looks like pushing through 109.00 this morning and consequently all the JPY crosses have moved too.
Understandably gold is higher as well as the price lifts above $1292 in overnight trading.
The other main barometer of risk in currency terms- the EURCHF is below 1.12 this morning and looks under pressure. This is always a good indicator of how the markets are taking current events. The other component to watch closely today is WTI which was ahead of the equity markets again yesterday and with that trading through $56 a barrel overnight, further losses will not go unnoticed by the equity markets in general and by the S+P in particular.
As I just noted, it is the last day of the month and that means there is potential for the usual month end FX fixing orders to impact the price action at various times today. The calls on that generally speaking do seem to favour month end demand for the USD, but how much of that is still outstanding is hard to gauge at this stage of the session.
The other pairing that could be impacted here is the GBPEUR which has so far this week continued to hold above that 1.1300 level, but if there is demand to sell the pound into the month end, then it could easily fall back below this level. For your guide, a break of 1.1300 equates to a move above 0.8850 on the EURGBP.
The GBPUSD did set a fresh, post January 3rd low of 1.2581yesterday, but rebounded into the close. However, and once again that rebound was only very modest and clearly the risk is that at some stage in the near future the price will test that 1.2441 2019 low again. Much will depend on the how the politics develop here of course.
What Trump’s characteristically heavy hand has done here; is to surely place in jeopardy the USMCA, which I understand has not yet been passed by congress anyway. Perhaps his latest moves rest in the fact that it may not, and now he wants to divert attention to any such failure by chucking a brick over the ‘Wall?’
Further to that, his latest actions cannot exactly bode well for the chances of a US/China deal either- not that I personally give that much chance anyway. After all, it must be clear to anyone now that unless Trump gets his way there’s never ever likely to be any kind of deal. At least all the evidence would seem to point that way wouldn’t it? As far as we are concerned, I guess that only leaves Bojo and Nige to suck up to him big time next week I suppose? A rock and a hard place for those guys then!
So, the markets are clearly rattled this morning and rightly so given all the latest news and that’s continued to have an impact on US yields which are lower again today with the10year yield now approaching 2.15%- around 100bp below where it stood 6months ago. I am just wondering how all this will evolve today, but surely the aroma from the coffee beans this morning is stronger than ever isn’t it?
Important Economic Releases Due Today
31/05- 1.30pm- Canada Q1 GDP Estimate
31/05- 1.30pm- US April Annualized PCE Estimate
31/05- 2.45pm- US Chicago May PMI index
31/05- 3.00pm- US University of Michigan Consumer Sentiment Index