No Compromise
The seemingly endless conflict between the world’s two largest economies and its respective leaders continues to grow more tedious. As a result of the tariffs going into effect today, both parties are now attempting to pressure the other side while proclaiming their own willingness to find a solution. China has named respectful discourse and being treated as an equal as their prerequisites for reopening negotiations, while the Trump administration refuses to back down and demands deference on trade matters. Now all that’s left is to wait for the next 267 billion US tariff package and speculate on how China will retaliate.
Closed Doors
Banks and exchanges were closed in China (Shanghai), Japan and South Korea today as each country celebrated their respective Mid-Autumn Festival. Meanwhile the Hang Seng and ASX 200, usually predictors of market sentiment, now went in opposite directions and gave no clear outlook. The Hong Kong index was 1.63% in the negative, while Australia closed 0.68% higher. The Hang Seng contains a number of Chinese stocks so it’s poor performance will likely be mirrored by Shanghai Composite tomorrow. The USD on the other hand continues to strengthen against most major and peripheral currencies, leading to a drop in commodity prices. The only exception was oil, which has seen an increase of 2% so far.
WTI
Oil prices shot through the roof due to the lack of consensus at this weekend’s OPEC summit. Last week’s US crude oil inventories were the lowest since 2015, which in itself could be enough to drive up prices. Even more important was the OPEC meeting, where some of the world’s largest oil producers discussed whether it’s possible to meet US demands and reduce Iran’s oil production to zero. Iran’s oil minister claims this weekend’s meeting is evidence that US sanctions are untenable because no oil exporting country can raise production enough to make up for the loss of Iranian (and Venezuelan) oil. Tensions escalated further when armed assailants, alleged by Iran to be US and Israeli terrorists, attacked a military parade in Ahvaz, claiming 25 victims. Iran threatened to take action against the US and Israel in response.
This year’s second big question, besides the China-US trade war, will be how the November sanction on Iran will affect the oil market. Which countries will ignore the sanctions and how will the US government react? The uncertainty caused by these questions suggests price will increase. Neither Iran nor the USA seem willing to back down, making it likely for other countries to get involved in the conflict. As a result, WTI started making attempt to break the $72 price level. If this line were to break, the next targets would be 73.13 and subsequently 74.42 while 71.42 would become the relevant line of support.
GBPUSD
September has been a good month for the pound, allowing it to bounce back from rock bottom and even strengthen against the USD. This trend seemed to break on Friday when the Cable saw it’s most notable decline in the past three months from 1.33 to 1.3050. Meanwhile a potential second referendum on Brexit is becoming an increasingly likely possibility that both the Labour Party and the Tories may support. The EU rejecting London’s proposed agreement at their Salzburg summit makes it necessary for the UK government to try and restore some of it’s legitimacy. UK politicians are now pressed for time and could be facing the possibility of a hard Brexit.
The decline last Friday did not give us much new information, as 1.33 was already too high a level for the pound. Now that the trend valid since September 5 has been broken, the likelihood of further decline is on the rise. The movement on Friday corrected back to the 50% Fibonacci retracement level within a span of 12 hours. As a result, Bolinger bands expanded considerably, signalling a rise in volatility. The most significant level right now is the 1.3175 line, since if price were to reach it, then it could realistically take another shot at 1.33. On the other hand if the 1.3175 resistance line turns price around, then downwards will likely become the defining trend, potentially falling below 1.3.
Sincerely,
Laszlo | Market Analyst
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