Trade war drives risk-off


Thursday began with investors continuing to absorb the implications of Wednesday's ambiguous guidance from Fed chairman Jay Powell, moved on through ambiguous purchasing managers' index readings and climaxed with the US President’s declaration that he will apply additional tariffs to Chinese imports. The net result was sharply lower prices for oil and equities and a mediocre day for the USD.

Markit's manufacturing purchasing managers' index unexpectedly improved from 50.0 to 50.4 while the more closely-watched measure from ISM equally unexpectedly fell half a point to 51.2. The two cancelled each other out and the USD drifted lower until Trump imposed the new tariffs. He said he will impose a 10% tariff on an additional $300 billion of Chinese goods. The suspicion is that the new taxes are intended to pressurize the Fed into further rate cuts.


This morning's data from Euroland were of relatively low importance. Italian industrial production fell 0.2% in June for a 1.2% annual decline. The euro zone producer price index was down by a monthly 0.6% and 0.7% higher on the year. Retail sales for June provided the only real chink of light. Monthly and annual increases of 1.1% and 2.6% were way ahead of forecast.

The trade concerns that pushed investors away from China and the States were modestly positive for the EUR. It delivered an average performance, strengthening by a third of a US cent.


Canada's Markit manufacturing sector PMI like its US equivalent, came in stronger than forecast. At 50.2, it was close to the US reading and a point higher on the month. The report noted rising employment numbers and a slower rate of decline for production and new orders.

The US president's announcement of new taxes on Chinese goods pulled the rug from under equity prices and oil, the assumption being that they will further dampen domestic and global economic activity. WTI crude fell 7% before stabilizing to log a 5% daily decline. After four changes of direction and a three-quarter-cent range, the Loonie is unchanged against the USD.


With the UK manufacturing PMI out of the way, the highlights of sterling's day were the Bank of England's policy decision and the presentation of the bank's Inflation Report by governor Mark Carney. As expected, there was no change to policy and in the event the governor said nothing in his press conference that investors had not already know, or at least guessed.

A parliamentary by-election in Wales also delivered the expected result, with the anti-Brexit Liberal Democrats taking the seat from the pro-Leave Conservatives. It leaves the Prime Minister with a Commons majority of one, as long as Ireland's Democratic Unionist party continues to support him. Investors saw the result as renewed push-back against a no-deal Brexit and they took the GBP higher in London this morning. It is just about unchanged against the USD.


This morning's Bank of Japan's money supply figures and the minutes of June's monetary policy meeting were of no interest to investors. They were far more exercised by the US president's tariff announcement yesterday afternoon.

Investors were taken aback by the new trade war escalation and they ran for cover. Their knee-jerk reaction was to seek the safety of the JPY. It strengthened by an almost-immediate 0.6% against the USD and is a net 2.0% higher on the day.

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