LCG Research Team: Trade Wars, Central Banks and Earnings. No Signs of a Summer Lull Yet.

 

To say there are a lot of market moving events going on would be an understatement. There is data flowing in from all directions; corporate updates are still coming in thick and fast on both sides of the Atlantic, three central bank meetings this week with the BoE next in line and further tensions emerging in the unfolding trade wars. With so many influencing factors, building a clear narrative is far from simple. From where we stand a summer lull still looks a long way off if it will happen at all.

No surprises from the Fed

Overnight the Fed, as expected kept rates on hold. The expectation was for a slightly more hawkish tone from the Fed in their statement and that was exactly what was given. No surprises and talk of a strong economy have cemented expectations of a rate rise in September, with a second hike before the year is out, being priced in at 64%. Following the Fed’s bullish assessment on the economy, 10-year treasury yields remained elevated at 3% and the dollar index closed 0.2% higher.

Trade war steps up a notch

An announcement by the White House that Trump is considering increasing tariffs to 25% on $200 million worth of Chinese imports successfully dampened sentiment, limiting post-Fed moves. This is a clear sign that trade tensions are escalating rather than easing up. The Dow and the S&P closed the session lower on weakened sentiment; however, the Nasdaq closed 0.5% higher, thanks to a 5% rally in Apple spreading through the sector and reversing the recent tech rout.

With fears rising that Trump’s trade war with China is only just beginning, investors are taking risk off the table once more. Asian markets are a sea of red and European bourses are pointing to a softer open. Safe haven Japanese yen is also better bid as trade fears overshadow central bank divergences.

Pound dips ahead of BoE decision

The pound was seen edging lower overnight as investors look ahead to the BoE monetary policy decision later this morning. A 25 bps increase to 0.75% is broadly expected, taking the rate over 0.5% for the first time in a decade. With the markets almost completely pricing in the hike, the vote split, and forward guidance will be closely scrutinized. A close vote and a dovish Carney could see the pound move through $1.3090 towards $1.3045. Meanwhile, a more convincing vote split could see the pound target $1.32, whether such a rally would have any staying power would depend on Friday’s PMI figures and Brexit headlines.

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Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.