The Pre Fed holding pattern

Summary

The trade war still has teeth, though it’s just nibbling shares outside of China.

Trade moves out of focus

A 1.7% retreat by Hong Kong shares points to a flavour of broader sentiment when mainland markets and a clutch of other Asian bourses re-open from a one-day break tomorrow. European shares also remain moderately offside, after China bowed to what was widely seen as the inevitable by calling off Washington talks. The balance is tipped toward weakness by tariff-sensitive automobile & parts shares and in the China-linked mining industry. But other influences are increasingly having a say. Comcast’s knock-out bid for Sky, 17% higher than previously offered, gives a fillip to broadcast stocks. Oil names also lead after Saudi Arabia and Russia jointly signalled production hikes don’t mesh with their current priorities. A lift is also visible amongst continental and London-listed retailers despite tentative talks between France’s Casino and Carrefour descending into acrimony. The point about rising consolidation pressure is not lost on investors. Elsewhere, numbers are being run on Tesco’s new Jack discount format, and at worst, the verdict is neutral, given the small initial commitment of 10-15 stores. That’s a de facto positive if the prize of new effective opposition to Aldi/Lidl can be grasped. Some of the red tint across markets—including Wall Street futures—has a precautionary eye to the Fed meeting. A 0.25% rise is fully priced; the dot plot of projected hikes (including Wednesday’s and in December) also looks baked. Investors are therefore weighing the risk that the median forecast for three more rises in 2019 rises could tilt higher.

Sterling leads fightback

The dollar has reached a related impasse that only policy contours will break easily this week. The market’s more optimistic reassessment of medium-term impacts from the new global trade order is holding. That’s to the detriment of the dollar for now. And yet, speculators continue to add to net longs. Residual benefits of fiscal stimulus (tax cuts) still feed through the economy: solid goods orders later this week, as expected, would be the latest instance. The 10-year Treasury yield is thereby comfortably above 3% and 2-year Treasury yields are setting a string of decade peaks. It’s difficult to see these conditions as underlying dollar negatives. The volatility around that constant is again being led by sterling. The pound is also resilient against the yen and franc among other majors. Huge incoming value implied by Comcast’s $40bn Sky bid is cited by some participants. It’s also clear some are playing the unwind of Friday’s aggressive reaction to Brexit deadlock, whilst the opposition Labour Party verges on backing a second referendum. The key decider of whether the reflexive Brexit correction is fleeting or not is whether cable can close comfortably above $1.320. That was a confirmed support before the rate spiked to its highest since July last week.

Watch Tuesday data

Monday’s static calendar could leave market participants to their own devices till the agenda hots up on Tuesday. Then, we will have Germany’s industrial price data, a business climate update from France—where growth has quickened this quarter—before official and unofficial U.S. residential property data. German CPI is another must watch on Thursday, ahead of U.S. durable goods orders. The headline outcome is likely to be skewed by a large order of Boeing aircraft in August.