- Investors await new Chinese tariffs;
- Positive Brexit comments offer hope for deal;
- IMF pessimistic on UK outlook particularly in no deal scenario.
It’s been a mixed start to the week in financial markets as investors await a possible announcement of new tariffs on China which could come as early as today.
The ongoing conflict between the US and China continues to be a primary driver of market sentiment, with investors concerned about the prospect of a full blown trade war as neither side shows a willingness to blink. It was reported last week that the US invited Chinese officials for further talks, something they were open to but reports over the weekend suggest this wouldn’t go ahead if Donald Trump follows through on threats of tariffs on another $200 billion of goods.
With China threatening to cosy up with Russia and the EU if Trump continues with this hostile trade approach, it will be interesting to see how the White House responds as lawmaker opposition may grow. Trump clearly thought this would be a straightforward monetary fight and may have been caught off guard by the willingness to use alternative tactics to fight back. Investors in the US are continuing to take this in their stride for now but that may not last.
The UK will be hoping to use the more hostile and fractured geopolitical environment to its advantage as Brexit negotiations continue. The deadline is fast approaching and we appear to be hearing a more open tone from EU officials who clearly view the risk of no deal Brexit as being very real and damaging and are therefore keen to avoid it. While the EU will still be fully committed to ensuring the UK doesn’t cherry pick post-Brexit and the single market integrity is protected, officials will be keen to minimalize divisions.
It’s this that I believe will ensure a damaging no deal Brexit is avoided rather than the worry of economic implications for the EU, which of course there also would be. The IMF warned of just that this morning, claiming that even under a broad Brexit agreement the economy will only grow at around 1.5% over the next two year, with a disruptive Brexit being significantly worse.
These pessimistic forecasts for the UK, both in the deal and no deal Brexit scenarios, won’t come as a surprise to anyone and will likely be heavily disputed by those Brexiteers who have constantly attempted to downplay the analysis of supposed experts. While the forecasts are gloomy, the expectations for a deal appear to be improving along with the more conciliatory comments in the media which is providing support to sterling.
The pound has run into some resistance around 1.3150 but continues to trade above 1.30 this morning after the IMF forecasts. I think this reflects a slightly more optimistic investor and assuming negotiations don’t suddenly turn sour, it could be a sign that the pound sell-off has run out of steam.
