MAIN EVENTS THIS WEEK
Monday: JP Manufacturing PMI, Tankan Survey, CN Manufacturing PMI, EU/UK Manufacturing PMI’s, EU PPI, US Markit & ISM Manufacturing PMI, Iranian President Rouhani in Switzerland and Austria to discuss nuclear deal (Monday-Weds)
Tuesday: AU RBA Rate Decision, UK Construction PMI, US Factory Orders, Durable Goods, IBD/TIPP Economic Optimism (Early close in US)
Wednesday: CN Caixin Services PMI, AU Trade Balance, Retail Sales, EU/UK Services PMI’s, US Market Closed (Independence Day)
Thursday: GE Factory Orders, US Challenger Job Cuts, ADP Employment Change, Weekly Jobless Claims, US Markit Services PMI, ISM Non-Manufacturing PMI, DoE Weekly Inventories, FOMC Minutes, UK BoE Carney speaking
Friday: US Non-farm Payrolls, Trade Balance, CA Employment Change, Trade Balance, Ivey PMI, UK Cabinet Meeting on Brexit, US Baker Hughes Rig Count, US import tariffs are put in place on $34bln of Chinese goods, US Secretary of State Pompeo travels to Pyongyang to follow up on the summit Trump and Kim Jong-un
Markets start a new week, month and quarter on a negative footing as global trade tensions hit a new high following a stern warning from the EU over the weekend that they would retaliate over car import tariffs. According to the FT, EU officials have not yet made a decision but have warned that the EU and other major economies would be “likely” to apply countermeasures to “a significant volume of trade”, with as much as $294bln potentially in the firing line if the US follow through on their proposal on car imports (accounts for 19% of US goods exported in 2017).
The verbal threat from Europe is the first time Brussels have responded in force and was somewhat instigated as a reaction to Trump’s comments on Sunday that the EU are “as bad” as China when it comes to trade. It is this tit-for-tat mentality that markets have feared the most and with US imports on $34bln of Chinese goods coming into effect on Friday there is a distinct possibility that things may well get worse before they get better.
Our friends across the pond also celebrate Independence Day on Wednesday which may well spur the President to speak out as he looks to take full advantage of the ‘America First’ mantra. Layering in this with lower trading volumes it could provide the perfect storm for a big risk off play into the end of the week if the situation deteriorates further.
Governing a European country in the current political environment remains as difficult as ever, but when the country in question is Germany, and the union of two parties (CDU/CSU) that have been the bedrock of German politics for the last 70 years, the proposition is starkly different.
The breakdown between Merkel (CDU) and Seehofer (CSU) has been well publicised in recent days but the relationship has further weakened after the interior minister has threatened to resign over the weekend. The main issue between the two parties is to do with Merkel’s decision to leave German borders open at the height of the refugee crisis, and now more recently following the agreement on migration last week in Brussels. Whether this threat from Seehofer materialises would be key but the likelihood of this happening is low as the CSU would lose their stance in Federal politics and Merkel will be reluctant to do anything drastic that may result in snap elections which would ultimately further weaken her stance and primarily benefit the AfD. A situation to be monitored this week until we get to some kind of compromise between the two sides. Away from the politics this also week sees that latest round of European PMI data but as discussed above the development of trade talks will likely dominant focus for the European markets.
From a broader long-term perspective there was a really useful infographic via ING last week that looks at some of the key issues facing the EUR over the next 12-months from trade wars and domestic politics to central bank decisions.
This was the tweet by the US President on Saturday where he stated an agreement to boost Saudi output well beyond that of what was agreed by OPEC and non-OPEC producers just a week and half ago. The news I can only imagine would have came as a great shock to the Saudi officials and an on the record response was tabled shortly after clarifying that the two had discussed the need to “preserve the stability of the oil market”, but did not confirm any agreement about the 2mln bpd figure mentioned by Trump.
I personally would not read too much into this and I simply see the President’s comments as Trump politically positioning himself in such a way as to influence consumer psyche for the driving season where he knows gasoline prices have been up at multi-year highs. Not only this a compliant Saudi to every wish of the US would have far reaching repercussions on the tension in the Gulf between Saudi and Iran, a situation that is already at its most fragile in many years.
Separate to OPEC, news this morning from Libya is that further political upheavals have resulted in two of their major loading terminals being suspended. Given these reasons I would continue to expect oil to be supported around the current levels with prices are still locked around the multi-year highs breached last week.
FOMC hawkish change of heart…
The release of the FOMC minutes on Thursday should be interesting given this is the meeting in which three interest rate hikes in 2018 turned into four for the Federal Reserve. Discussions surrounding the tweaks to the SEP, with focus on inflation moving back to target, will likely generate a short-term flurry of activity but nothing more than that as markets quickly turn back to the trade situation alongside the release of the latest US non-farm payrolls report. As for the jobs data, it is the usual drill in that the number of jobs created is secondary to the wage component which the Fed are still monitoring closely to gauge future inflation.
Brexit a secondary issue for markets this week…
The latest on Brexit is that UK PM Theresa May has produced a third possible model for the UK’s post-Brexit customs arrangement and is going to be discussed at a cabinet meeting this Friday, according to the Guardian. However, within the hour EU sources have already fired back and stated that the white paper would never be accepted. As such, we remain in limbo for now and given the events discussed from Europe and the US, in addition to potential flare ups in global trade talk, I would not be expecting too much of UK politics to feed into the price of GBP this week.
From an economic data perspective, the latest UK Manufacturing PMI reading was relatively unchanged and had little repercussion on Cable and as per usual the release of the Service PMI reading on Wednesday will carry more weight.
If you missed the market briefing this morning you can recap the full session HERE. Have a good week ahead.