US stocks fell sharply and government bonds rallied after President Trump posted on his Truth Social account that he was planning “massive increases” in Chinese tariffs after Beijing threatened to impose large scale export controls on goods. The dollar initially sold off modestly, only to stabilise, while risk currencies have bounced back and US futures are up so far today after Trump toned down his rhetoric over the weekend. We’ve been here many times before, of course, and markets will be quietly confident that this is another instance where Trump’s bark is worse than his bite.
The US federal shutdown continues with no end in sight, although the government will at least be releasing the September CPI report on Wednesday. The European calendar is light. Focus should therefore remain on the reignition of the trade war between the US and China, as well as the possibility of an agreement to reopen the US government. The UK jobs report will also merit some attention.
GBP
Market participants continue to scrutinise the fiscal picture in the UK, although it will be a while before we get any concrete news on this front, with the Autumn Budget not set to be unveiled until 26th November. Friday's risk aversion in markets supported the gilt market, leading to a very welcome drop in government borrowing costs, as traders sold stocks and bought sovereign bonds worldwide.
Macroeconomic data out of the UK is holding up reasonably well so far. This week's labour market report on Tuesday will provide a key check on the state of the economy, and we will be watching particularly closely to see whether the drop in payrolled employment continues into an eight straight month. Thursday’s monthly GDP data for August is seen showing a modest rebound in activity, although this report runs on somewhat of a lag and could be partly overlooked by investors. For now, but we expect sterling to continue to trade very much in line with the euro.
EUR
Political noise in France was no doubt one of the factors behind last week's rally in the dollar, as the euro has become the main alternative currency to the greenback as a store of value and means of exchange since Liberation Day. While the worst case scenarios of fresh elections and/or a resignation of President Macron have been avoided so far, it remains very difficult to see how a 2026 budget is passed through such a fragmented government.
Concerns surrounding the political impasse in France are unlikely to go away any time soon, particularly should markets grow increasingly fearful that the malaise will weigh on growth in the bloc next year. With fiscal concerns increasingly central to markets, this may act to keep the euro on the back foot. There’s not too much on the docket this week, but we will be keeping tabs on Wednesday’s Euro Area industrial production figures after last week’s German data showed an unexpectedly sharp contraction. Absent any major surprises, the focus will probably remain on French politics.
USD
The lack of economic data releases due to the government shutdown makes it much harder to gauge the state of the US economy. There is also no end in sight for now, with markets weighing up the very real possibility that the closure could eclipse the 2018/19 shutdown as the longest on record. For now, markets don't seem to mind much, and the dollar actually appears to be the safe-haven currency of choice, in part a reflection of the market’s less favourable view towards the yen following the recent Japanese election.
Investors appear far more worried about the flare-up of the US-China trade conflict. Trump has pledged an additional 100% tariff on the country in retaliation to China’s imposition of export controls on rare earths, of which it is almost the sole supplier. This is expected to take effect on 1st November, although the dialling down in Trump’s rhetoric over the weekend suggests that there’s plenty of time and room for negotiations. The initial reaction to the news was to sell the dollar, confirming that investors do not regard trade wars as a dollar positive.
