Asian stocks failed to continue their growth on Tuesday as trade tension between the US and China casts a shadow over the economic activity in the Asian region. Pound sterling remained strong, swaying in a limited range against the dollar despite the failing of the British government after the withdrawal of several high-ranking officials.
The Chinese blue chip index ShComp continued its decline on Tuesday (-0.4%) after an attempted buyer resistance on Monday, during which it added 2.47%, rebounding from a round level of 2700 points. Growth in the beginning of the week was the highest since August 2016. The level of consumer prices in China increased in line with the forecasts of 1.9%, while production inflation surpassed the forecast in June, reaching 4.7%, against 4.5% of the forecast. For the Chinese economy, domestic demand is now important, and this is likely to smooth out the trade shocks from the US, so data on imports and consumer inflation remain a priority. The fragile position of firms in China, in particular because of the high level of leverage, forces traders to be cautious with the data, despite their positive notes.
Japanese Nikkei and Korean Kospi closed today in positive territory, trying to copy the optimism of American “colleagues.”
Despite the low-key reaction of the stock market after the introduction of tariffs, faith in the dollar is gradually being lost. The weighted average dollar rate against other major currencies moves towards a monthly low at 93.00 and yesterday’s recovery from 93.70 is unlikely to last. Closer to Thursday, the market is likely to begin to factor in the probability of weak inflation for June, along with some weakening in the labor market.
The impact of tariffs on US companies will be clear from the earnings report for the second quarter, which will begin to appear on Friday. The dollar might receive another blow on this front. While the US stock indices are trying to squeeze the most out of the current mood, yesterday the S&P 500 showed the best result since the end of March. The index of fear VIX continued to decline on Tuesday, falling to 12.5 points. Volatility suppressed by option traders will allow traders in the stock market to open long positions, focusing on solid future reporting.
The resignations in Theresa May’s cabinet had little effect on the pound, after dropping to 1.3190, as GBPUSD was able to push back up already struggling for level 1.33 on Tuesday. Disagreements in the government followed May’s desire to maintain close ties with the European Union after withdrawing from the bloc. First, the minister responsible for Brexit, David Davis, left, followed by Foreign Minister Boris Johnson. The Conservative Party has the opportunity to displace May from her post, as she has lost her main allies, but they are unlikely to take advantage of her. The pound concentrates on the economic data and the decision of the Bank of England in August and focus on a whole range of data, including production activity, service sector, GDP, trade balance. These data will significantly clarify the case with the August meeting of the Bank of England. The target for the pound is level 1.3350 – 1.34.
Today, we also expect data reporting sentiment in the euro area. ECB Chief Economist Peter Pratt, said that we should not expect an increase in rates until the end of next summer, it is unlikely that the ECB will change its position on this issue in the release of positive data. Therefore, while the euro depends on the dollar, the effects of trade are likely to create tensions for the euro area.
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