As we head into the new week, trade tensions will remain a key focal point for the markets and risk sentiment. In the U.K. specifically, Brexit and Theresa May’s ability to cling to power ahead of next week’s European elections will be an important driver of domestic risk sentiment.
Asian markets tumbled overnight, and U.S. futures are pointing to a softer start on the open amid growing concerns over whether the U.S. and China would be able to salvage a trade agreement. The U.S. sharply hiking tariffs on Chinese imports and China threatening to retaliate has thrown into doubt the possibility of the two sides reaching a deal after almost a year of talks.
There are three possible outcomes from here. Firstly, a deal gets agreed quickly, secondly after extensive further negotiations a deal finally gets agreed or thirdly the talks completely break down and a full-blown trade war ensues. We are definitely not there yet. The base case scenario is that a deal will still be achieved, it is just going to take a lot longer than the market had been pricing in over recent months.
News that Trump will talk with China’s Jinping Xi at the G20 in June has done little to stem risk aversion, with U.S. futures down nearly 1%. Flows into the yen have stabilised with USD/JPY holding steady and off lows at 109.8. The last time the pair met was back in November and the trade dispute eased significantly. Investors are not prepared to start pricing in that possibility just yet.
UBER slumps 8% on first day
After huge publicity leading up to one of the most eagerly awaited IPO’s, Uber (NYSE:UBER) closed its first session as a publicly traded company down 8% on Friday. The ride hailing business plummeted from its $45 initial public offering price at a much faster pace than its rival Lyft (NASDAQ:LYFT), which went public 6 weeks earlier but has already shed 20% of its value. The message from Wall Street is clear that investor appetite for ride hailing firms is not what the hype expected it to be. But perhaps that’s not surprising given the complex business model and an opaque road to profitability that both firms suffer from.
Pound Steady at $1.30
The pound hovers around $1.30 in early trade amid growing concerns over Theresa May’s ability to cling on to power and as cross-party Brexit talks are close to collapse. Labour's insistence on a second referendum is a sticking point which could lead to the collapse of the talks in the coming days.
The pressure continues to mount on Theresa May as opinion polls over the weekend showed a surge in support for Nigel Farage’s Brexit party. The polls highlighted the scale of the threat on the Conservatives ahead of the European Parliamentary elections and a possible general election. We expect to hear further calls for her to leave which will keep the downward pressure on the pound.