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Risk Appetite Improves As U.S. - Chinese Trade Talks Move Into Focus

Published 08/20/2018, 05:28 AM
Updated 04/25/2018, 04:10 AM

Signs of a de-escalation of the trade war between the US and China offered some relief to the markets at the end of last week. Whilst the reaction from investors to news that China was sending a trade delegation to Washington, with officials on both sides drawing up plans for a comprehensive trade accord was hardly ecstatic; it was sufficient for the Dow to close higher on Friday and the dollar to ease back from recent 18 months highs versus a basket of currencies as haven demand eased.

The dollar pullback could be short-lived as investors look out across the new week. Minutes from the FOMC are expected to add colour to the Fed’s unequivocally hawkish statement at the latest meeting, serving to remind us that the Fed remains on track to hike again in September. This is then followed by the Economic Symposium in Jackson Hole, Wyoming, a meeting by central bankers, which is often used to give forward guidance and offer insight into major policy change. Should Fed Chair Jerome Powell stick to his familiar message of continued tightening regardless of the unfolding situation involving emerging markets, the dollar could push higher, retaking is recent highs.

The most important risk event this week is the start of the US-China trade talks on Tuesday and Wednesday. Should we start to see signs of progress in trade negotiations between the two powers, risk appetite will improve. However, headlines to the contrary are likely to see renewed demand for the dollar and flows out of currencies such as the Aussie dollar, the pound and the euro.

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Will evidence of the US-EU trade spat show up in August PMI data?

Whilst there is plenty of data later in the week, including minutes from the latest European Central bank meeting, Monday sees a quiet start as far as economic data is concerned, with just German producer prices and eurozone construction PMI’s headlining. Other eurozone PMI’s are set to follow in the week and will be closely scrutinised as investors continue to look for any signs of damage from the recent US trade tensions. So far there has been little evidence of the eurozone economy being hit by the US trade spat; however, any signs of a slowdown could send the euro lower.

Turkey closed, low volumes big swings

Investors will likely continue to keep an eye on the Turkish lira after sharp falls just a week earlier sent fears of contagion through the markets. Whilst confidence has lifted towards Turkey and the crisis appears to have temporarily settled, it is by no means out of the woods yet. Turkish markets are closed this week, which means volumes will be particularly low, therefore big swigs could be expected potentially unnerving traders once again.

House prices dive in August

The Rightmove House Price Index showing an unexpected tumble in the price of houses in August will ensure that home builders are under the spotlight in trading today. House prices plummeted -2.3% month on month, well above the previous decline of -0.1%. Whilst it is typical for prices to fall at this time of year, given that more sellers arrive on the scene, this year’s fall was sharper than that of previous years, fuelling concerns over the health of the UK housing market.

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