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Europe higher as tariffs hit Chinese stocks

By Craig Erlam Senior Currency Analyst at OANDA

China underperforms on worrying industrial data

We’re likely in for another turbulent week in financial markets as investors continue to try and navigate incoming news and data and determine just how bad the sell-off is going to be.

Stocks in Europe are expected to open around half a percentage point higher at the start of the week providing some early relief, although as we’ve seen in the past in such environments, this can very quickly change. Asia was mostly higher overnight which may provide a little comfort, although China missed out as profitability at its industrial firms slowed for a fifth month sending shares deep into negative territory.

Trade wars is one of many headwinds for the markets right now, alongside Brexit, the Italian budget, higher interest rates and more. The Chinese data we’ve seen so far does suggest there’s been some impact from the tariffs although we’ll have to wait a few months to see the full extent. Recent data may be skewed to the downside to offset the front loading of orders that took place prior to the tariffs being imposed. While the decline in the currency may limit the impact of the tariffs though, the data does suggest there will be a notable impact.

More regional pain for Merkel weighs on the euro

German markets are holding up surprisingly well this morning, despite the fact that Merkel’s government once again looks under threat, although the euro is faring a little less well early in the day. Another weaker showing for her CDU party and that of her junior coalition partner, the SPD, in regional elections on Sunday has threatened to destabilise what is already a fragile union between the centre right and left parties.

It’s not just the SPD she has to worry about, her sister party, the CSU, had a similar disappointment a couple of weeks ago in Bavaria which is going to drive many now to question whether she is still the correct person to steer the country and lead the party. She only recently won a fourth term but confidence is waning and the leader of the SPD implied that if things don’t improve next year, the coalition could collapse which would surely mark the end of Merkel’s reign and create unusual instability in German politics, which has shown it’s not immune from the populist, anti-immigrant far right.

All eyes on Hammond’s austerity ending budget on Monday

Philip Hammond has the unenviable job of delivering the UK budget on Monday, a task made all the more difficult by Theresa May’s pledge to end austerity at the Tory party conference. Hammond must now set out a plan to achieve this while steering the UK through Brexit, despite the outlook being foggy and no deal having been agreed between the two sides.

Hammond on Sunday may have quickly poured cold water on an austerity-ending budget today though, claiming that once a deal is agreed, the fruits of the British people’s hard work are in sight. This sounds like a roundabout way of kicking the austerity can down the road, which may leave people very disappointed today. As ever, the pound will give us the best insight into how well received Hammond’s plans are.

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