What has happened
The US market eked out another gain yesterday leaving the headline index around 1% below the record highs set in mid-February. This comes as the European indices have quietly underperformed over recent weeks. June saw a sharp rotation into European equities, but July’s unwinding is continuing into August, in part due to some mixed data but also the viral pick up which is becoming a key story for markets.
Trump flexes his executive muscles
Yesterday saw two executive orders escalating trade tensions. Firstly, the US has reinstated tariffs on some Canadian aluminium imports which were previously exempted. This comes just a few weeks after the new NAFTA deal came into effect so is warning shot to investors believing that the administrations sole focus is the US/China tension. On that topic, President Trump took executive action to prohibit US businesses from working with TIkTok and WeChat after a short grace period of 45 days. Whilst technology, and specifically social media platforms, are currently a focus of the White House this forms part of a broad mosaic of actions including cracking down on trade practices, criticism of the new security law in Hong Kong and sanctions over alleged human rights abuses in Xinjiang. The Canadian tariffs are interesting as it appeared that many in the Trump administration, Pompeo being a prime example, were setting up a ‘West versus China’ narrative, the Canadian tariffs suggest that the US has not moved away from its broader protectionist stance.
US employment report
Today’s US employment report will be a data highlight of the week with the market expecting the unemployment rate to tick down to 10.6% from 11.1% last month though there may be room for a beat given yesterday’s weekly numbers. After flat lining for several weeks the initial weekly jobless claims fell dramatically yesterday. Clearly it is too early to say whether this is a continuation of the previous improving trend or whether it is an aberration but sets up a better backdrop for July and August. One factor that may be at play is the expiration of the $600 per week federal benefits top up, a key part of the current fiscal package negotiations, which may have, on the margin, disincentivised filing for unemployment benefits.
What does Brooks Macdonald think
The US dollar has been weakening against the Euro in recent weeks. There will be a few factors at play here: less demand for safe haven currencies, recognition that an EU recovery fund deal was met and US cases remaining high. A strong US nonfarm payroll report today could start to shift that balance if it suggests that, at a time when European cases are rising, the US economy has been resilient.