After weeks of speculation over the next step in the trade dispute between the world’s two largest economies, the negotiations in Washington could have a key impact on the global economy and market sentiment. We consider the outlook for forex, equities and commodities.
President Trump insists China is desperate for a trade deal. However, the alarming slide in US economic data, suggests he is deflecting attention away from his own doorstep (shocking, I know). A global slowdown is beginning to accelerate, the US is not immune. Institute for Supply Management data shows the US manufacturing sector is contracting at decade lows (bad signal for the global economy), but now the outlook for Non-Manufacturing (services) sector is at three year lows (bad for US domestic). The US economy is c. 70% household consumption, so this deterioration in services will ring alarm bells for the FOMC. In a recent deluge of Fed speakers, it was notable that the dollar weakened as Charles Evans (voter, leans dovish) suggested that in the event of a shock to the US economy, a “modest policy response will not nearly be enough”. The dollar had outperformed following the September Fed rate cut as the FOMC appeared divided over the path of its next move. This recent ISM deterioration will surely push the Fed to further easing (Fed Funds futures are pricing for around one and a half cuts by December). Progress in the US/China trade negotiations will be key. With limited traction towards an agreement, a deterioration in the outlook for risk could have further legs to run. Safe havens will again be the big winners, with yen strength and a new lease of life for gold. So it could after all be down to Donald Trump as to whether the Fed pushes forward with a sustained program of rate cuts. The trade talks are crucial, resuming on 10th October.