Fears that the trade dispute will morph into a prolonged trade war sent Asian stocks lower overnight. European and US futures are pointing to another day of losses.

The steps being taken by each of the powers, but principally the US are not actions of those interested in calling a truce. The US considering Huawei like sanctions on another Chinese technology firm is sending a message that the US is not looking for a truce. Actions by both sides are more in tune with nations looking to push this standoff into a prolonged period of tariffs and sections – a full blown trade war.

The overriding issue for the markets is what impact this will have on global supply chains, the health of individual companies and the health of the global economy. Traders will be scrutinising economic data more than ever over the coming months looking for signs of deterioration stemming from the trade war. The Japanese flash manufacturing pmi turning negative could just be the start of a much deeper downturn. Asian markets hit fresh four-month lows and there is potential for stocks to go a lot lower.

Fed stays patient

The dollar barely reacted to the release of the FOMC minutes. There were no surprises. The Fed stuck to its guns over its patient approach believing that softer inflation was transitory. There was nothing in the minutes to suggest a rate cut was on the cards, although this meeting was held before the escalation of the US – Sino trade dispute.  The dollar is moving cautiously higher versus a basket of currencies in early trade as it is the best of a bad bunch.

Pound drops as May on borrowed time

The pound is showing no signs of letting up its prolonged slide lower. Theresa May is clinging to power by a thread as her cabinet desert her. Pound traders are bracing themselves for a pro-Brexit replacement sooner rather than later. Its looks unlikely that May will last until June. A pro Brexit PM brings to option of a no deal Brexit back to the table. This could see the pound fall back to support at $1.20.

Euro dips as European elections kick off

Whilst the euro has been out of the spotlight this week, that is about to change, and volatility could pick up over the coming days. The European Parliament holds its continent-wide elections, starting today until Sunday. As nationalist, eurosceptic movements have been gaining support, concerns are rising that populist parties will perform well in these elections. Eurosceptic parties could gain over a third of the 751 seats up for grabs at the European Parliament. This is the Parliament that will make decisions from the Union over the coming 5-year term. Signs that the populist parties have sufficient seats to block legislation and be more confrontational could weigh on the euro.

Prior to the results, the euro also has ECB minutes and PMI data to deal with.

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