FTSE dives on trade tensions EM fears and a Brexit boosted pound

The FTSE gapped lower on the open and continued to decline across the session with losses accelerating in the afternoon. A combination of continued weakness in emerging markets, a lack of progress in trade talks, a drop in the price of oil and a stronger pound have resulted in the FTSE shedding over 0.8% and slipping below 7400.

Fear of contagion from emerging markets
The selloff in emerging markets has spread beyond Turkey and Argentina to some of the developing world’s largest economies such as Russia, South Africa, Mexico and Indonesia. These economies are seeing a sharp selloff in both stocks and currencies which is unnerving investors, with fears of contagion sending European shares lower and contributing to a softer open on Wall Street. Whilst Turkey and Argentina started out as the weakest links in the EM space, investors have been shaken and are broadly looking to reduce their exposure with investors questioning which economies are most vulnerable and where is spill over likely.

Trade tension remain as more tariffs loom
Running parallel to EM fears, concerns over escalating trade tensions are also driving market sentiment. A consultation period on Trump’s proposal to impose tariff on an additional $200 billion of Chinese imports comes to an end tomorrow and could see investors look to move out of riskier assets in Asia in the overnight session. This is a central negative theme which shows no signs of going anywhere soon. Clearly, President Trump is not about to soften his stance unless the Chinese (principally) make some serious concessions, which have not been made in three rounds of negotiations so far.

UK service sector grew faster than forecast
Adding to the FTSE’s woes was the stronger pound, which strengthen after better than expected service sector data. The service sector PMI rose to 54.3 in August, up from 53.5 in July and above forecasts of 53.9. The impressive figures for the service sector came as relief to pound traders following disappointing numbers from the manufacturing and construction sectors earlier in the week. The numbers also suggest that the dominant service sector is powering economic growth in Q3, which is expected to be around 0.4%, in line with Q2. 

Pound soars on Brexit hopes
The pound soared this afternoon, as traders finally had some encouraging Brexit news to cheer. The pound leaped 1.2% versus the dollar immediately after early reports of progress in Brexit talks between UK and Germany. There are suggestions that Germany will drop some key Brexit demands, a move which has just come in time for pound bulls after the chances of a Brexit deal had been looking extremely shaky.