London Capital Group: Stocks as mixed as the messages on US - China trade

London Capital Group: Stocks as mixed as the messages on US - China trade

May 7, 2019

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Asian markets picked up off 5-week lows and Europe is pointing to a mixed start on the open as investors continue to focus on President Trump’s latest threat to raise tariffs on Chinese goods. Following Trump’s tweet on Sunday, markets remain fragile. The overriding concern here is that Trump has single handedly halted the recent recovery in risk appetite by potentially derailing trade talks.

Investors will watch trade developments closely. News that China could still send officials to Washington on Thursday and Friday for negotiations has placated traders. This was event from the V-shaped recovery yesterday that saw US indices claim back most of the day's losses. While the two sides are still talking there is some hope that they can work through the pressure added by the US President. However, we are skeptical they can do so before the 12:01am deadline on Friday. This means markets probably need to see the Friday deadline for raising US tariffs on Chinese goods pushed back to avoid another sell-off

What has become clear is that there is still a lot of work to be done before a trade deal between the world two largest economies is achieved. That doesn’t mean its impossible, just that it could take longer than the two sides were initially letting on and the market was pricing in. Whilst the tariffs could be in place quite quickly, given the fluid nature of these negotiations and Trump’s volatile nature, they could also be removed or reduced quickly. This optimism is offering some support to stocks.

Oil Extends Gains On Gulf Tensions

Oil prices were moving cautiously higher in early trade on Tuesday after a volatile session on Monday. On the one hand the escalation of the US – Sino trade dispute is generating concerns over the future demand for oil. On the other, rising Gulf tensions is offering support after Israel passed intelligence to the US regarding an alleged plot by Iran to attack US interests in the Persian Gulf.  Oil dived over 2.3% dropping briefly through its 200-day moving average at the start of the week before performing a spectacular reversal and rallying over 3.3%. The prospect of an Iranian strike on US interests is far more concerning for oil traders than the escalation of the US – China trade dispute.

Pound Pushes Higher on Brexit Developments

Brexit will be back in focus as British traders return to their desks after an extended holiday weekend. The pound is up 0.2% in early trade on Monday after pushing comfortably through $1.3100 overnight. Brexit developments remain mixed, although traders are focusing on the positive headlines coming from the cross-party talks.

Many Conservatives are threatening to attempt to oust Theresa May should she unite with Labour over a customs union style arrangement with the EU. However the PM could have enough support to be able to ignore those backbenchers and get the Brexit deal through Parliament. This is what pound traders are focusing on, lifting sterling.

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