Risk-Off Thursday

Continued fears over US-China trade spark a flight to safety, while the pound remains pressured by political uncertainty

Previous Day's Market Highlights

Markets struck a risk-off tone on Thursday as battle lines hardened in the ongoing US-China trade war, with the lack of a specific date for a restart of talks seemingly the major factor weighing on global markets. Investors sook safety in the havens of the Swiss franc and Japanese yen, with both currencies rallying by over 0.5% - the latter chalking up its biggest one-day gain against the greenback in 2 months. Other typical risk off moves were also in evidence, with 10-year Treasury yields falling to their lowest level since December 2017 and gold prices adding a shade less than 1%. Further weighing on risk appetite were reports that the US would not begin trade negotiations with other blocs, such as Japan and the EU, until the China conflict had been resolved, along with continued political uncertainty in the UK. The pound continues to struggle across the board, trading largely unchanged on Thursday amid a lack of political news having recovered after printing fresh 4-month lows against both the dollar and euro earlier in the day. 

The single currency remained relatively resilient, ticking up by 0.2% against the dollar, despite poorer than expected flash PMI figures for May. Data showed the manufacturing sector remaining in contraction for a 4th consecutive month, with a PMI reading of 47.7. Meanwhile the services sector expanded at its slowest pace in 4 months, with the PMI falling to 52.5 - the latter being a concern with services having recently been offsetting declines in economic activity elsewhere. Also of interest to markets were minutes from the ECB’s latest monetary policy meeting, with ECB policymakers expressing lower confidence in an economic recovery over the second half of the year. Despite the euro’s resilience, the releases and ECB comments emphasise the fragile state of affairs for the bloc’s economy. 
Across the pond, the dollar shed around 0.25% against a basket of peers, retracing from a fresh 2-year high as trade concerns weighed on the greenback. Despite usually seeing demand as a safe-haven, markets remain concerned over the impact of escalating trade tensions on the US economy, hence the lack of support for the greenback. Economic data was also relatively disappointing, with new home sales figures missing expectations, falling to 673,000. Meanwhile, the Canadian dollar lost around 0.3% after a steep fall in oil prices. 
Away from FX, the risk-off tone spread into equity and commodities markets, with both recording steep declines. In Europe, the pan-continental Stoxx 600 equity index lost 1.4%, while the US benchmark S&P 500 closed more than 1% lowerFinally, oil prices fell by more than 5% due to demand concerns stemming from increasing trade tensions. Global benchmark Brent shed 5.1%, trading at almost a 2-month low, while US WTI crude lost more than 6%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1325 1.1776 1.1312 3.94%
GBP/USD 1.2665 1.3176 1.2605 4.33%
EUR/USD 1.1180 1.1265 1.1107 1.40%
GBP/AUD 1.8390 1.8882 1.8240 3.40%
GBP/NZD 1.9430 2.0021 1.9340 3.40%
GBP/CAD 1.7060 1.7728 1.6902 4.66%

Today's Market Highlights

The week concludes with a relatively quiet economic calendar, ensuring that ongoing political and geopolitical issues will remain front and centre. Markets are likely to seize on any conciliatory comments from either side of the US-China trade conflict, with any signs of decreasing tensions likely to see a relief rally in risk-sensitive assets. Meanwhile, the UK political situation will remain in focus, with the Prime Minister’s future still hanging in the balance. Expectations are for the PM to meet once again with backbench MPs, with continued demands for May to set out a departure timetable, likely resigning around 10th June. Should a timetable not be set out, MPs on the 1922 Committee are set to vote on whether to change internal party rules to allow a no-confidence vote to be held, a vote which is almost certain to succeed. Either way, the lack of political certainty is providing a stiff headwind to the beleaguered pound. 
On the data front, April retail sales figures are due from the UK, though are likely to be of little interest to markets against a backdrop of ever-increasing political uncertainty. Despite this, sales are expected to have decreased by 0.3% on a month-on-month basis, the first decline in sales since December 2018. Also expected to fall is the less volatile core sales measure, which removes fuel sales, with a decline of 0.5% anticipated. Elsewhere, durable goods orders from the US are the only other notable release, with orders set to have declined by 2% last month. The drop in orders may be a negative sign for future economic growth, with the release being a useful leading indicator of economic activity. No central bank speakers are due today. 
Looking ahead to next week, the economic calendar remains quiet, with focus set to remain on ongoing political developments. While attention will continue to centre around the Prime Minister’s future, markets will also be assessing the result of European Parliament elections, with the Parliament’s current ‘grand coalition’ likely to lose its majority due to the potential rise of populist, anti-EU parties. Elsewhere, the Bank of Canada’s monetary policy decision is due, though no change to rates is expected. As always, markets will continue to look for any hints of the future policy outlook. On the data front, focus will be on US (2nd estimate) and Canadian (1st estimate) GDP figures in addition to revised consumer sentiment figures from the US. The euro-area and UK data calendars lack any top-tier releases.

Today's Economic Calendar

Time Currency Release Consensus Previous
09:30 GBP Retail Sales (m/m - Apr) -0.3% 1.1%
09:30 GBP Retail Sales ex-Fuel (m/m - Apr) -0.5% 1.2%
13:30 USD Durable Goods Orders (Apr) -2.0% 2.8%