Global escalation of trade wars

Last week


Trade wars are back! Last Thursday, the US deadline for negotiating import tariffs with China amounted to 25% for goods worth up to $200 billion is over. However, there was no agreement or announcement. On the other hand, the US President Donald Trump warned against even stronger increases in tariffs, for goods valued at up to $267 billion. All three major US stock indices lost and closed with losses. Giant tech Apple, which is one of the main drivers of the S&P500 index, could also be remarkably hit because it manufactures its products in China. Among other things, Trump also announced that Japan will now also be on target for import tariffs. Trump is uncompromising and wants to achieve his goals. His efforts to reverse the negative trade balance of the US with the vast majority of major economies are still moving market sentiment and investors vigilance is on a high alert. Trump's tweets seem to have more weight than many economic indicators these days. As far as the Free Trade Agreement (NAFTA) with Canada,  no decision has yet been made, although positive vibes on the negotiations have been heard. NAFTA cannot enter into force if Trump's administration does not agree on a deal with Canada. For Canada, NAFTA is key as the US is the destination of most of Canadian exports. Trump is now blocking the trade situation with China, the European Union and Canada. Newly, his administration is also frowning at Japan.

There have been many important reports in Australia. Australia's Reserve Bank left interest rates unchanged, and the RBA Rate Statement either did not have a major impact on the currency. The significantly better news was seen in the quarterly GDP, which grew by 0.9%, which is two-tenths better than expected. The upward correction of the previous print was also favorable. The Trade Balance then rose in a surplus and it also exceeded expectations. Paradoxically, the AUD has lost value over the week and is at a two-year low. The two major banks in Australia unexpectedly raised interest rates on mortgages, without any impetus from the Reserve Bank. The Australian dollar is also exacerbated by tensions in China-US trade relations.

The US Non-farm Payrolls (NFP) reported excellent readings when 210k new jobs were announced. More important were wages that exceeded expectations as well and rose at a rate of 0.4%, compared to the expected 0.2%. The unemployment rate, however, rose by a tenth of a percentage point to 3.9%. Although the US dollar strengthened, it oscillated more or less in the range for the rest of the session. The reason is the investors' certainty that the Fed will raise interest rates this month, which is already priced-in and so bulls now have no primary impulse to enter the market.

The European Statistical Office, Eurostat, said on Friday that both the European Union and the Eurozone's GDP grew by 2.1% y/y and by 0.4% in the quarterly comparison. It signals the robustness and stability of the economies of the euro-area countries as well as the entire European Union. This latest news from the old continent is pretty much favourable, unemployment is at its lowest, Greece has left the rescue program, agreement on Brexit may soon be sealed, Germany is attracting large investments, and the Eurozone inflation is now exactly where it is desired by ECB President Mario Draghi. In addition, the ECB is to end its quantitative easing this year.

This week

Key fundamental indicators from the UK will be released on Monday and Tuesday. The first announcement will be monthly Manufacturing Production and GDP. Monthly GDP is a whole new report and this time it will only be the third print of its kind and the first one without a common quarterly result. It will be interesting to see how strong it might be, unless a possible diversion of Manufacturing Production affects a consensus on the direction of the Pound. Data from the Labour market will be released on Tuesday. Although the unemployment rate is low at 4%, wages do not grow as needed, which is crucial for the Bank of England. The rise in new jobs is now expected at 2.5%, a tenth of a percentage point higher than in the previous period.

On Thursday early in the morning European time, we will see results from the Australian Labour market. In the past month, after about a year and a half, we saw a loss of 3900 jobs instead of an expected rise. Surprisingly, however, the unemployment rate fell to 5.3%, and this is predicted to remain the same this time. The Aussie has been weak lately, especially due to the geopolitical situations. Possible good news from the Labor market could erase part of the losses and at least strengthen the market sentiment in a short term.

United Kingdom interest rates are scheduled for Thursday. Last month, the Bank of England raised interest rates, mainly due to rising inflation. The Bank Board votes were unequivocal when all 9 members voted for an increase. However, there was also the thesis that the increase in rates was unjustified and more or less the pretext for a possible cut. By doing so, BoE would make a provision for the possible negative consequences of a no-deal Brexit. The British pound has gone down in the last few months and has fallen below post-Brexit's values. However, negotiations with Prime Minister May's cabinet with the European Union on the terms of the exit agreement move the markets almost every day. If there is no clear deal, the BoE is unlikely to make any changes to monetary policy.

A decision of interest rates in the Eurozone. The European Central Bank will declare its unchanged base rate of 0.00% and after less than an hour, President Mario Draghi will come to a scheduled press conference. The ECB is gradually limiting the purchase of bonds and the plan is to end the program by this year. Mario Draghi has told several times that the ECB will proceed to a possible rate hike of its zero rates no sooner than in the second half of next year. At this conference, it will be interesting to follow comments on the recently decreased inflation, as well as concerns about trade wars. Last week, there were also drops in Yields of Italian bonds, and this can be discussed as well. Although there is no expected key position or change from the ECB, the volatility of the euro will certainly be guaranteed during the presser.

Together with the beginning of the ECB's conference, US Inflation will be released, measured by CPI indicator and, in particular, Core CPI that does not include automobiles. In July, Core CPI was at the 2.4% year-on-year comparison, which is a good enough reason for the Fed to raise rates. This time, the headline CPI is expected to be a tenth of a percentage point better than the last result, at 0.3%. Core CPI is expected to change to 0.2%. On Friday, the Retail Sales and Core Retail Sales will be released in the United States. Both are expected to be slightly weaker than previous readings. Although these fundamentals are important, they will no longer have any relevance for FOMC to the decision-making on interest rates later this month.

Scheduled Geopolitical events

  • Trade negotiator for the US, Robert Lighthizer, arrives in Brussels for trade talks with his European counterpart Cecilia Malmström.
  • The International Monetary Fund Mission to Ukraine will resume talks on the financial assistance program for Ukraine.
  • Trade / free trade talks between the European Union and the South American Association of Mercosur will take place over a week.
  • On Wednesday, European Commission President Jean-Claude Juncker will present his last speech on the State of the Union.
  • On Thursday and Friday, a meeting of the Presidents of the European Union is held in Latvia and a total of 14 presidents are confirmed.


Pavel Dusek