Trade fears dominate market sentiment.

US economic data had a softer tone, although trade fears dominated market sentiment. Increased fears over trade wars undermined risk appetite and currency-war fears intensified after the US officially named China as a currency manipulator.

Global equity markets declined sharply with a 3.0% decline for the S&P 500 index. Bond yields also declined with US 10-year yields at fresh 34-month lows below 1.75%.

Risk appetite recovered to some extent in Asia on Tuesday as China resisted further yuan losses with equity markets paring losses.

Crude also regained some ground as risk appetite attempted to recover. Gold pushed to fresh 6-year highs on global risk aversion before correcting on Tuesday.

Scandinavian currencies were hurt by global trade and growth fears while political fears continued to erode Sterling support.

Trade fears dominated with increased fears over damage to the US economy from any escalation in the dispute. There was a sharp shift in US Fed Funds futures with the chances of a further cut in September seen to have increased to 40%.

President Trump called the Chinese yuan decline a major violation. He also stated that it was currency manipulation and asked whether the Federal Reserve was listening. Treasuries rallied further in New York with the 10-year yield retreating to around 1.77%. Wall Street slumped with the S&P 500 index declining 3%, although the dollar showed some resilience.

The UK PMI services-sector index strengthened to 51.4 for July from 50.2, above consensus forecasts and the highest reading for 9 months. There was a rebound in new business with a notable improvement in export orders as Sterling weakness boosted demand. Overall confidence was still fragile amid political uncertainty while cost pressures remained high.

The EU Commission reiterated that the Brexit Withdrawal Agreement was not open for re-negotiation and that it was moving towards accepting a ‘no-deal’ outcome as the likely outcome. Sterling sentiment remained negative with the underlying tone of risk aversion also an important negative factor and EUR/GBP pushed to 23-month highs at 0.9250.

There was subdued retail sales data with a 0.1% underlying increase in the July BRC survey. Some respite in risk conditions helped Sterling stabilise as GBP/USD traded around 1.2150 while EUR/GBP retreated to 0.9220.

Economic Calendar

Expected Previous
07:00 German Factory Orders (M/M)(JUN) 0.50% -2.00%
17:00 FOMC Member J. Bullard Speaks - -
23:00 AiG Construction Index(JUL) - 43

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