Traders pause to take stock

August is traditionally a slow month in the financial markets as traders take their vacation. This year is turning out to be no different although there also appears to be an element of contemplation taking place. The reaction to Boris Johnson bringing his more confrontational style to the role of Prime Minister has seen the pound fall to lows not seen in two and a half years as a no-deal Brexit becomes more likely.

The UK Parliament is now also on its summer break and it is probable that when it returns on September 5th, MPs will be faced with a motion of no-confidence brought by the opposition followed by a battle to ensure that the UK doesn’t leave the EU without a deal.

Having passed the motion two years ago that set in motion the Brexit process, MPs have spent a great deal of time agreeing what they don’t want but precious little finding a deal they can agree upon.

With time running out for any fresh initiative to be found and acted upon, the charge that was levied against Theresa May that the UK could “leave the EU by default” is being heard again.

The Q2 GDP data is due to be released tomorrow. While that will provide some relief from the constant discussion of Brexit, the UK’s departure from the EU will have had a significant effect on both current activity and future investment by business.

Market analysts expect GDP to have been flat in the three months to June, leading to a year on year increase of just 1.4%.

Yesterday, the pound weakened versus a directionless dollar, reaching a low of 1.2121 and closing at 1.2142.

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Chinese trade data shows tariffs not the answer

China released its trade data for July overnight. The data made it clear that Chinese exports have not been affected by the tariffs that have been placed on a range of goods by the Trump Administration. Exports rose by over 10% year on year, while the trade surplus, which tends to mirror quite closely the U.S. deficit, rose from $40 billion in June to $45 billion.

With China showing its willingness to allow its currency to weaken versus the dollar earlier this week, it may be time for a rethink from Washington about how it deals with its trade partners, not just China.

While its trade relationship with China is key, they are also the U. S’s largest creditor by far and any disruption to that relationship, no matter how small, would have tumultuous consequences not just for the U.S. but for the entire global economy.

Essentially the trade/debt cycle means that China basically lends to the U.S. to fund its imports of Chinese goods.

While President Trump has been fretting over the number of goods that the U.S. imports, China has been busy securing its supply of raw materials. It has virtually monopolised Australian exports to such a degree that the two economies are now inextricably linked. They have made investments in several African nations to secure the same preferential treatment. While the U.S. has become more protectionist under Trump, China has been allowed to grow its economy, which is vital to its plans for dealing with its burgeoning population.

Yesterday, the dollar index rose a little on the day in directionless trading, closing at 97.65. Having corrected since the Fed meeting last week, it now stands at a crossroads as traders await further guidance.

Euro weakness to continue

One of the major failings of the Eurozone, and there have been a few, is its inability to protect itself against shocks in the global economy.

The economic reason for the European Community morphing into the European Union with all the paraphernalia that followed was first of all protectionist but then to ensure that the region was able to command sufficient influence to ensure its received its fair share of the “global trade pie.”

This has backfired spectacularly with the region. Far from becoming the global manufacturing and trade powerhouse, the Eurozone has found itself at the mercy of other nations with no tools to ensure its own survival.

While Brussels was spot on in its judgement that the U.S. would remain the world’s biggest consumer and would shift its manufacturing base overseas, it badly underestimated how China would evolve in terms of the range of its exports but also just as importantly, its quality.

As the global economy has slowed, even after the shocks of the financial crisis, the Eurozone has found itself unprepared and coupled with a banking crisis which has so far been ignored, slipping further into economic decline.

The single currency is weakening, which should be beneficial to Eurozone exporters, but with no one to sell to and China very hard to compete against, the decline could be terminal. Yesterday, the euro was unchanged versus the dollar, closing at 1.1199.