European markets are trading higher on the back of unexpected improvement in German industrial production number in August. This improvement in the economic numbers happened after 2 consecutive months of decline. This news is going to help the overall sentiment for the German economy because there were strong feelings that the German economy is heading towards a technical recession. Remember, Germany is the economic engine of the eurozone, and a slow down in Germany means a slowdown in the eurozone. The actual number printed a reading of 0.3% against a forecast of minus 0.2% while the previous reading was minus 0.4%.
However, it is important to keep in mind that the overall production is down, nearly 4% on the year, and given that the factory orders are not in a healthy condition, this means that the overall turning point for the German economy is still somewhat arduous. This is the chief reason that we have not seen much improvement in the euro against the dollar. It is down by minus 0.4% year-to-date. It has lost minus 4.13% of its value against the dollar. The chart below shows all the important support and resistance levels.
Trade Talk and Filtering The Noise
The positive momentum is also flowing into the market because investors are somewhat hopeful about the US-China trade deal. This comes on the heels of confirmation that Chinese high-level delegation along with the head of the PBOC heading to Washington for trade-talk later this week. Clearly, investors are filtering through the noise and looking at the more positive side when it comes to trade talk.
The reason that I’m saying this is because the Trump administration has put 8 Chinese tech companies on a blacklist. From a trade negotiation perspective, it only anchors the tensions between the 2 countries. Hence, being optimistically cautious is the way forward when it comes to trade negotiations.
We’re not expecting any groundbreaking deal between the US and China and this isn’t going to stop the major economies of the world heading towards a recession. Unless we get all the tariffs removed, it won’t be far fetched to say that the US is also likely to head towards a recession as well.
The interim deal will only provide a short term pop, and given that this is not going to last for long, markets are likely to face more trouble. The slowing economy is going to bring the earnings expectations down rapidly.
Expect Dull Moments From Powell
In terms of Jerome Powell, the Fed chairman’s speech, we do not expect much coming out from the chairman today. We believe that he’s going to keep his options open. He is expected to avoid the road which would make his route narrow. Under the light of recent economic numbers, and the likeliness of a short term deal on the trade war front, we do expect another rate cut towards the back end of this year.
Looking at the market expectations on the interest rate cut, market participants are 70- 80% confident of this becoming a reality. We think that Jerome Powell’s speech is going to be disappointing for the market and this is because he would like to have his options open for his future path and the market is expecting a more dovish speech from him today.