Improved risk sentiment was short-lived, bring on the volatility

Good morning

A temporary bout of improved risk sentiment saw European equities finish up around the 2-3% area yesterday and for a while it looks as though US markets would do the same.  That was until Trump slapped a 104% tariff on China after Beijing had refused to remove its retaliatory tariffs.  US equities turned negative and overnight Asian markets followed suit.  US/China trade tensions don’t look like easing any time soon as Trump accuses China of weakening CNY to offset the impact of tariffs. 

GBPUSD ended the day slightly off its highs at 1.2760, but off its lows vs EUR at around 1.1690.  USDJPY had a 100 point push higher late afternoon from 146.65 to 147.65 but dropped off back below 147.00 into the London close.   Since then it’s all change once again, the latest escalation in tariffs sent USD lower pretty much across the board.  GBPUSD traded up to 1.2860 this morning, EURUSD got as high as 1.1090 and USDJPY broke lower to 144.60.  USDCHF also  traded down to 0.8385.  Classic safe haven buying of JPY and CHF.

Plenty of speculation over the course of action the Fed may take from here.  There have recently been calls for more Fed cuts in 2025 than previously thought but others now think that with the likely rise in inflation Fed may have to stay on hold until or unless the US labour market starts showing real signs of weakness.  Trump wants Fed to cut but he may be disappointed.  He may also be disappointed to see US 10 year yields up at 4.5% from a low earlier this week of around 3.9%.

So Trump’s tariffs are playing havoc with the markets and global trade in general.  The US continue to insist that they are simply righting the wrongs that have been in place for so long.  The White House has said some seventy countries have already got in touch with them to negotiate on trade, but the key country really is China and they don’t look like coming to the table any time soon.  Still even those who do negotiate may find it difficult to make an agreement.  I believe Vietnam’s offer to reduce tariffs to zero was rejected.  Lowered tariffs are one thing, but Trump is looking for deficits to be cleared as well.  His suggestion that EU buys $350bn of US energy is more about clearing the existing deficit before any tariff talk can take place.

Overnight RBNZ did cuts rates 25bps to 3.5% as had been expected, NZD did see a brief push higher suggesting the markets were possibly considering a larger cut, GBPNZD traded from an overnight high of 2.3285 down to 2.3085, bounced again to 2.3260 before dropping to the 2.3100 area.  GBPAUD saw similar moves, popping up to 2.1600 briefly, dropped below 2.1400, back up to mid-2.15’s, now 2.1380.  Volatile, that’s for sure.

RBI also cut rates 25bps as expected in the early hours of this morning, bringing their rates to 6%.  INR is generally weaker, USDINR now 86.55 and GBPINR around 111.00. 

Moving on from the market turmoil, I was pleased by the reactions to both previous reports this week, the first from a few people who said they’ love to join me for a beer in the sun but probably wouldn’t have made it in time, and then yesterday a small but important number of people who are not yet clients gave a glimmer of hope of a meeting in the not too distant future.  To be honest, it is quite good to receive anything back from anyone about anything I’ve written, even if its in disagreement with something I’ve said.

I watched the Arsenal v Real Madrid match yesterday and I have to say Arsenal scored two of the finest free kicks I have seen for a long time, Declan Rice scored both, in the process paying back a decent chunk of the £100m Arsenal paid for him.  Their third goal was pretty good as well, giving them a 3-0 lead to take into the second leg.  Not bad for a team currently without a striker.  Kane’s Bayern Munich lost 2-1 to Inter Milan.  More Champions League action this evening as Villa take on PSG, while the fourth quarter final sees Barcelona take on Borussia Dortmund. 

Mark will berate me if I don’t mention Leeds and their 1-0 win over Middlesbrough last night which was enough to get Leeds back to the top of the Championship as their nearest rivals Burnley and Sheffield Utd could only draw and lose respectively.

A sparse economic calendar today but of course tariff talk will dominate the headlines.  European equities are already lower this morning, setting the tone for the day I fear.

Have a great day…

-  13.30 ECBs Cipollone speaks

-  19.00 FOMC minutes

-  02.30 China CPI, PPI