September 27, 2019 / 8:07 AM / a month ago

Daily Briefing: Trade and tech war, politicians trading insults - toxic mix for markets

LONDON (Reuters) - To the toxic mix of trade wars, recession fears, Brexit and Gulf tension, add in the impeachment proceedings against President Donald Trump and accusations from a whistleblower the White House tried to lockdown evidence of his conversations with the Ukrainian leader to try to smear Democrat presidential candidate Joe Biden.

U.S. President Donald Trump arrives aboard Air Force One at Joint Base Andrews, Maryland, September 26, 2019. REUTERS/Jonathan Ernst

Reports that American firms may not be allowed to supply China's Huawei hit chipmakers and tech firms last night in the United States and this morning in Asia. Chinese shares are near three week lows after data showed industrial firms; profits contracted last month by 2%, highlighting the impact trade wars are having.

After a gloomy close overnight on Wall Street and a fall in Asian shares of between 0.3% to 1.3%, European shares are nonetheless opening firmer and U.S. equity futures are signalling a stronger open in New York. An MSCI index of world stocks is set for a second week of losses, its worst week since mid-August.

In Europe too tech shares are down but overall the mood is more cheerful - latching on to reports that the United States and China are set to restart trade talks on Oct. 10, and China’s promise to buy more U.S. pork and soybean products. And of course, chipmakers are not as thick on the ground in Europe as in the United States or Asia.

The FTSE is up almost 1% as the sterling weakens following dovish comments from BoE policymaker Michael Saunders. Those comments have added further downward momentum to sterling, already pummelled by the Brexit impasse – the currency is down 0.3% as Saunders said it was “quite plausible” the next policy move could be a rate cut.

Prime Minister Boris Johnson gestures as he speaks in parliament, September 25, 2019

British gilt yields are down 5 basis points. The pound is headed for its worst week since early-August.

Signs of trade war tensions easing has led to the dollar coming off a 2-1/2 year peak hit against the euro on Thursday. Any reversal in newsflow on that front could well see it test the key 1.0900 mark.

Some market participants suspect the dollar was also helped by continued tightness in dollar funding after the recent rise in U.S. short-term borrowing costs. But the euro had factors working against it too.

Aside from this week’s dismal run of data, we had the resignation of German ECB board appointee Sabine Lautenschlaeger that showed up the extent of opposition within the ECB board to the stimulus but also raised some expectations of a dovish replacement. But ECB Chief Economist Philip Lane told Handelsblatt the ECB has leeway to cut interest rates further. He will speak again today in the United States.

In terms of data the European Commission releases economic confidence indicators that may show if service sector confidence is sliding further. In other data, U.S. PCE is due with expectations that the core PCE will have risen +0.2% m/m in August, implying annual core inflation at 1.8%.

European bond markets have seen some interesting moves this week especially the periphery where yields are again close to tumbling below zero with the biggest weekly yield falls in six weeks – but they did not follow Treasuries’ lead yesterday when U.S. yields tumbled in response to the whistleblower report.

But yields this morning are back above 1.7%, though in Europe Bunds remain moribund, not responding even to comments from Chancellor Angela Merkel hinting that a degree of fiscal stimulus might now be appropriate.

Europe's shares are shrugging off pressure in Asia and on Wall Street, drawing comfort from reports Washington and Beijing will meet for the next round of trade talks in a few weeks. The Eurostoxx is up 0.4%. Paris stocks may get an extra lift from a government pledge to cut taxes by more than 10 billion euros ($10.9 billion) next year.

Dark clouds are looming though with a profit warning from U.S. chipmaker Micron overnight renewing concerns about demand from smartphone makers and reports that the United States may reinstate curbs on American companies supplying China's Huawei, one of the world's top smartphone markets. Dealers expect Infineon, AMS, Siltronic and STMicro to fall 2%.

Europe’s major stock indices are on track for their third straight monthly gain, but it’s been a tough week for the region’s markets amid political chaos in London and Washington, dire data renewing worries about the bloc’s health and as investors brace for U.S. import tariffs to be slapped on billions of dollar worth of European goods. The pan European STOXX 600 and euro zone benchmark are on track for their first weekly drop since mid-August.

More bad news to digest from the embattled banking sector with Commerzbank warning on full-year revenue. Its shares are down 3% in premarket.

Emerging stocks and currencies are both on track for daily as well as weekly declines. South Africa’s rand softens 0.3% on the day, Russia’s rouble slips 0.2% and while China’s yuan and Turkey’s lira are treading water.

While the former three are all on track for weekly declines, the lira is in line for a 1.2% gain since Monday with signs that the central bank frontloaded cuts and easing tension with the United States calming investors’ nerves.

In stocks, heavyweights Hong Kong and Taiwan slip 0.2-0.4%, dragging the index lower. Though China mainland stocks enjoy 0.3% gains, they are on track for the biggest weekly decline since early August as trade tensions cast a long shadow.

Data out on Friday shows that profits at China’s industrial firm contracted in August as weak domestic demand and trade tensions hit balance sheets.

— A look at the day ahead from Deputy EMEA Markets Editor Sujata Rao. The views expressed are her own —

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