Weekly Review: Complacency Returns to Markets Even With the Trade Talk

This week, with little economic data coming through, the biggest news was on trade. Trade has continued to dominate the financial markets as the two biggest economies flex their muscles. On Wednesday, the Chinese government announced fresh tariffs on US imports such as cars and crude oil. The total tariffs announced were worth more than $16 billion and showed that the two countries will continue to battle. Earlier in the week, a representative of the Chinese government said that companies like Apple will likely be used for bargaining purposes. Still, the trade issues did not have major impacts on the financial markets. As shown below, the volatility index continued to decline during the week.

The Reserve Bank of Australia met earlier in the week and announced its interest rates decision. The central bank left interest rates unchanged as was expected. In the statement that followed, the bank’s officials said that there was a likelihood that they would move on interest rates in a near future. They pointed to the growing Australian economy, which has seen falling unemployment rate and increased labour market tightening.

After the RBA, the Reserve Bank of New Zealand (RBNZ) met and left rates unchanged. Their rate decision was expected. What was not expected was the decision to leave rates unchanged until 2020. This pushed the New Zealand dollar down to the lowest level in almost one year as shown below.

The British pound was a major loser this week. The decline started on Monday after the Foreign affairs secretary, Liam Fox sounded a warning about the risks of a no-deal Brexit. He said that there was a 60% chance that there will be a no-deal Brexit. This was less than a week after the Bank of England (BOE) governor sounded a warning, saying that the risk of a no-deal Brexit was uncomfortably high. Last week, the European Union main negotiator rejected parts of the proposals of Theresa May. The two sides have a point to prove. The European Union wants to be tough on the UK to prevent other members from leaving. The UK on the other hand wants a deal that will likely lead to other countries wanting to leave the union.

Another big news was about the US sanctions on Russia. The Trump administration announced fresh tough sanctions on Russia for a poisoning incident in the UK. Russia has denied involvements in the poisoning. The sanctions came two weeks after Trump met with the Russian president, Vladmir Putin in Helsinki for a controversial summit. The new sanctions led to a sharp decline in the Russian ruble.

Finally, CPI numbers were big news this week. Yesterday, data from China showed that the CPI was 2.1%, which was higher than the expected 2.0%. The United States is expected to release their CPI data. The US data is expected to show that the CPI rose by 3.0%.

On Friday, data from Japan showed that the GDP for the second quarter was at 1.9%, which was higher than the expected 1.4%. The United Kingdom is also expected to release the GDP numbers.

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