LCG: US equity futures down on mutual US, China tariffs, Sterling under pressure as British MPs face critical decision – By Ipek Ozkardeskaya

 

06:05am BST | September 2nd 2019

US equity futures sold off along with most Asian stock indices at the start of the week, as $100 billion worth of Chinese goods were hit with 15% US tariffs as announced earlier this year. Additional $160 billion worth of goods including cellphones and laptops will be subject to 15% tariff from December 15 onwards. China retaliated with higher tariffs on $75 billion worth of US imports. Though the US-China face-to-face trade talks are still scheduled in September, the mood has only gotten worse with the imposition of new, mutual tariffs.

The US 10-year yield remains below the 1.50% level as investors call for another rate cut from the Federal Reserve (Fed) in September meeting, given that the global trade disruptions could further weigh on the US economy. But the FOMC members sound increasingly reluctant to cut the rates further, to avoid President Trump from explicitly using the trade war as a political tool to pressure the Fed for lower interest rates for his 2020 presidential election campaign. Still, the market assesses 100% probability for a Fed rate cut at the FOMC’s September 18 meeting. The chance of a 50-basis-point cut stands at 20%. As a result, the Fed may be brought to lower its interest rates again at this month’s meeting, unless it takes the difficult bet of disappointing the market and triggering a massive global sell-off to restore its power.

The S&P500 (-0.42%), the Dow (-0.43%) and Nasdaq futures (-0.77%) edged lower on rising trade tensions and increased uncertainty of a renewed Fed action in September. Nikkei (-0.36%) and ASX 200 (-0.40%) slid on Monday, while Shanghai’s Composite (+1.07%) outperformed. Hang Seng (-0.47%) led losses as violence escalated in Hong Kong streets at the 13th straight week of anti-China protests.

The US dollar was mixed in Asia. The Kiwi (-0.35%) and the Aussie (-0.09%) fell the most against the US dollar among the G10 currencies, the Swedish krona (+0.18%), the euro (+0.10%) and the Japanese yen (+0.12%) strengthened as investors moved toward safe-haven assets.

Gold jumped to $1534 an ounce, as low sovereign yields, limited risk appetite and gold’s admirable performance as a safe-haven asset continued pushing capital toward the precious metal. Gold gained investors’ trust as it rallied by more than 22% against the US dollar since the beginning of May and there is little reason for this to change in September with Brexit uncertainties adding to the mix of global worries.

The pound continues struggling with ugly British politics as MPs return from the summer break to the most challenging Brexit fight within the Parliament. British MPs will vote to prevent a no-deal Brexit on October 31st this week, and the Conservative Party has a slim majority of just one to carry on with a no-deal divorce. Labour Party will announce more details on its plans to block a no-deal exit on Tuesday and Boris Johnson is afraid of losing some Tories’ support, which could have material consequences for his Leave strategy on October 31st. Hence, he is pressuring the Tory MPs to stand next to him, with the alternative of being sacked otherwise. Losing majority and blocking a no-deal Brexit would mean an extended Brexit deadline beyond October 31st, a scenario utterly dreaded by Boris Johnson and investors who are ready to swap some certainty against a prolonged period of negotiations with the EU. On the other hand, it would obviously be shocking for the British democracy if the Parliament didn’t have a final say in such a historically critical decision. As a result, September will likely be no respite for the pound.


Pound traders have mixed feelings, though the downside risks prevail due to substantial Brexit uncertainties. Although compromising the October 31st exit would keep the UK in the vicious circle of Brexit negotiations, it could be better than leaving the bloc without a deal and realizing heavy losses. Hence a no confidence vote for Johnson this week could give a short break to pound sellers, while an ultimate victory for Boris Johnson could wipe away the last drop of hope to save the country from a messy EU divorce and send the pound toward the 1.20 level, or below, against the US dollar.


The FTSE futures (+0.36%) hint at a slightly positive start at 7212p. But energy and mining stocks will likely remain under the pressure of rising global trade tensions.

Opening calls

FTSE is expected to open 5 points higher at 7212                             

DAX is expected to open 17 points lower at 11922        

Financial Markets and Political Commentary
 

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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.