Trade Tensions Pressurise Global Equities

Flaring trade tensions between the US and China sent global stocks into the red. The FTSE managed to buck the trend and keep its head above water thanks to the weaker pound. The pound at fresh 4-month lows is beneficial for the multinationals on the FTSE that earn revenue abroad.

President Trump weighing up whether to target more Chinese technology firms is the latest news bite to send stocks lower. However, the selloff was capped as traders also digested reports that   Trump would meet with China’s President Jinping Xi at the end of June. Equities across the board were trading lower, whilst safe haven gold moved gained ground.

FOMC minutes in focus

The dollar was higher versus the yen as investors looked ahead to the release of the Fed minutes. The minutes relate to the FOMC at the beginning of May. Fed Chair Jerome Powell was less dovish than the markets had been expecting, as he downplayed the chances of a rate cut. This less dovish tone could be echoed in the minutes, especially given that the FOMC was prior to the recent escalation in US – Sino trade tensions

We expect the minutes to highlight the Fed’s belief that weak inflation is transitory We also expect the minutes to reiterate the Fed’s patient stance.

Since the meeting two weeks ago the pictured has changed and concerns have grown over the potentially negative impact that the escalating US – Sino trade dispute could have on the US and global economy. Going forwards the Fed could look to cushion this by cutting rates. According to the CME Fedfund the markets are now pricing in 100% probability of a rate cut before the end of the year.

Why is dollar still king?

So why is the dollar advancing even as the market is pricing in a great probability of a rate cut? Basically, the dollar continues to be the best of a bad bunch. The pound is under pressure from Brexit, the euro from weak growth across the eurozone. The Aussie and the Kiwi are both out of favour owing to the trade war and lower interest rate expectations. The yen’s appeal has been lifted thanks to its safe haven status, although is limited thanks to its ultra-low interest rate.

One of the narratives impacting the other currencies needs to change in order for the dollar to change its course.

Theresa May out?

The pound tanked lower as rumours circulate that Theresa May could resign within the next 24 hours amid Brexit chaos. The pound fell to a fresh 4 month low against the dollar and the euro. The backlash from Theresa May’s revised Brexit deal was almost immediate and has continued intensifying over recent hours. The overriding concern for pound traders is who will replace Theresa May. A pro- Brexit candidate and a no deal Brexit becomes very likely. Under these circumstances the  pound could fall back towards $1.20.