Appetite for risk is minimal right now as traders remain cautious over trade, but there is a degree of balance with positive news on Chinese manufacturing data. Markets are still reacting to an escalation in rhetoric over various trade disputes that President Trump is picking across the world. Friday’s sharp deterioration in sentiment is still reverberating this side of the weekend as traders come back to their desks on Monday morning. The broad sense of protectionism and a deterioration in global trade links is impacting across markets. This is seen in the classic moves to safety. Bond yields have accelerated lower, equities volatility is rising , investors are moving into gold whilst the yen and Swissy are outperforming. There is scope for this move to continue, however, during times of high anxiety in markets there is also the potential for sharp swings either way. So caution needs to be taken with this unpredictable US President (remember reaction to delaying the autos tariffs last month). Markets also have a tendency to over react too. Sentiment is currently against the dollar, but focus on the PMIs could swing this today as the US economy remains the best of a bad bunch. China Caixin Manufacturing PMI held up well and beat expectations at 50.2 (50.0 exp, 50.2 last). And so we look towards this morning’s European PMIs and the ISM later.
Wall Street closed sharply lower on Friday with the S&P 500 -1.3% at 2752. With US futures lower again by -0.4% this morning, the tide of selling seems yet to be stemmed. Asian markets were negative this morning, with the Nikkei -1.1% and Shanghai Composite -0.3%. European markets are set up for early selling with FTSE futures -0.4% and DAX futures underperforming at -0.8%. In forex there is a mixed look to USD this morning, with commodity currencies (AUD, NZD and CAD) gaining after the China PMI beat whilst JPY is also giving back some of the recent gains. In commodities, gold continues to run another $5 (+0.4%) higher, whilst oil remains under pressure another percent lower.
On the economic calendar, the first trading day of the month is dominated by the manufacturing PMIs. The early European session is dominated by individual countries, with the Eurozone final Manufacturing PMI at 0900BST. The consensus suggests that the flash reading of 47.7 will be confirmed which would be down from April’s 47.9. The UK Manufacturing PMI is at 0930BST and is expected to drop back to 52.0 from 53.1 in April. The US ISM Manufacturing PMI is at 1500BST is expected to improve to 53.0 (from April’s 52.8) which would be interesting considering Markit’s flash manufacturing PMI slipping sharply recently.
Chart of the Day – AUD/JPY
Risk appetite has taken yet another leg lower with Friday’s sharp bearish candlestick on Aussie/Yen. A solid bear candle with a closing level not seen since June 2016 (the wake of the Brexit referendum result). Technically, the market has also closed clear of a mini range below support at $75.30 which also implies $74.20 as a downside target. The move comes with a renewed bear signal on RSI back below 30, with MACD also rolling over. There is a band of overhead supply now between