Trade headwinds build

Summary

Markets shrugged off concerns that worsening trade relations could soon drag on global growth on Monday, after the latest sign that the U.S. economy remains robust.

One eye on jobs, one on trade

Progress following weekend discussions between the U.S.’s and China’s top trade negotiators was unclear, whilst the mood at this week’s G7 summit will also be soured by tariffs. However, at the start of the week, global stock markets were extending Friday rallies that followed Friday’s blow-out U.S. jobs data. Dow, S&P and Nasdaq futures erased earlier negative tilts to trade higher, whilst MSCI’s index of 14 Asia-Pacific stock markets rose 1% to a 2½-week high and Japan’s Nikkei jumped 1.3%.

China to U.S.: don’t flip-flip

U.S. Commerce Secretary Wilbur Ross dubbed talks with China’s Vice Premier Liu He “Friendly and frank", though they concluded with no new agreements. Details on consensus reached last month in Washington for China to ramp purchases of U.S. goods and services were also left for “final confirmation" at another date. The constructive mood was also tempered by China's warning that the U.S. should not flip-flop again: “If the United States introduces trade sanctions including raising tariffs, all the economic and trade achievements negotiated by the two parties will be void.” Still, the progressive end to talks supported the dollar against the yen and should aid global exporter shares. Sentiment remains sensitive though, to any sign relations could sour again. A further round of discussions has yet to be scheduled. In the meantime, it’s difficult to rule out an escalation of the simmering dispute.

5-Star voted for euro-exit funding

EU fractures will remain prominent on investors' radar this week as investors scrutinise budget plans of Italy’s new government, secessionists regain control of Catalonia’s government and as critical Brexit talks approach. Still, the euro joined a raft of other major currencies gaining momentum against the dollar as European investors sustained a less alarmed view on Italy’s unconventional new government. “Italy does not want to quit the euro”, said a 5-Star delegation at the EU parliament on Friday. They had just voted in favour of proposal to make EU funds available to help countries quit the euro, reflecting the coalition’s continued ambivalence. The vote was rejected. Italy’s new government also faces clashes with the EU on goals to increase spending, despite government debt outpacing GDP by 132%.  “Not even European Central Bank president Mario Draghi is right when he says the euro 'is irreversible”, new economy minister Tria said last year. So, many ingredients for EU-Italy coalition confrontations remain. This will keep the market watchful. Italy’s ten-year bond yield has plunged from last week’s four-year highs but remains elevated relative to norms. This and relative U.S. economic strength vs. EU will challenge EUR/USD as it approaches $1.1728, the euro’s late-May peak before a reversal that took it to 10-month lows. EUR/USD was last at $1.1692, up around 30 pips.

Sterling’s Doomsday Monday

The pound was finding the going tougher to shrug off Brexit headlines. Sterling managed to achieve the key symbolic goal of closing last week above the $1.33 marker, despite the greenback’s lift from jobs news. But GBP/USD was only a modest 16 pips up from Friday’s $1.3347 close at the time of writing, getting a fillip from a better than forecast rise by the PMI for the UK’s relatively small construction sector. Scepticism that Downing Street will have proposals in place by an EU summit next month weighed on sterling, amid a weekend of ‘doomsday scenario’ reports. "I am absolutely confident as we get to the June council meeting that the prime minister will have a good set of proposals", said new Home Secretary Sajid Javid. Rapid progress will be needed to make this happen by the 28^th-29^th June summit. There’s been little movement since the EU castigated draft UK options on Northern Ireland and customs last week. Seasonality could see the pound gain against the dollar this month in line with historical patterns. Expectations on economic data that prove too pessimistic could also help, with further PMI readings coming this week.

ISM release in focus

EU industrial inflation readings coming late in the morning were still on the calendar among data releases worth watching, though such top-tier readings will peter out later in the day, perhaps excluding U.S. factory orders. It will be Tuesday morning before attention broadly turns to Japan’s Household Spending and a service PMI, and Australia’s interest rate decision, with no change forecast. The Eurozone will join the PMI bandwagon later Tuesday and will also release Retail Sales updates. The key release for the first half of the week though will be the ISM’s service-sector orientated PMI, which unusually will come after instead of the prior month’s payrolls figures. Confirmation from ISM Non-Manufacturing’s employment component of the strong showing in official jobs data, will go a long way to underpin the dollar’s firmer performance since Friday.