Morning Note: Trade war weighs, Bitcoin surges

European equities drifted lower as trade tensions and fears about global growth continue to weigh on market sentiment.

The FTSE 100 was struggling to hold onto 7,200 on Monday morning. The DAX shed 1% to drop beneath the 12,000 round number support.

President Trump on Friday raised tariffs on $200bn worth of Chinese imports from 10% to 25% and is now examining slapping tariffs on all remaining goods imported from China – worth about $300bn. The rhetoric and posturing is not good for risk and events over the last few days diminish the likelihood we will see a meaningful deal done. When we look at the posturing with Iran, it looks like the geopolitical hawks in the White House are in control. And unlike the weak Theresa May, Donald Trump is prepared to do no deal rather than a bad deal.

US futures soften

The S&P 500 somehow managed to close higher on Friday, but futures are now pointing towards a sharply lower open with renewed pressure on the downside. Somehow or other the Vix closed the week lower than it’s starting point but we this rising again now with the fear gauge printing a 19 handle again. This could push up past 20 again.

A paucity of eco data this week will keep the markets looking at Trump and China. Fed speakers this week will likely reiterate the current party line. US retail sales will be important with expectations relatively upbeat that US consumers are putting their money where their mouth is and spending more.

Bitcoin flying

So what’s the ultimate trade war hedge? It may well be cryptos – not really but Bitcoin has spiked again, this time breaching the $7k mark. The massive resistance at $6,400 was taken out having been the big hurdle for the bulls. 

Why? Who knows, but the momentum is building for bulls and you cannot ignore that once Bitcoin builds up a head of steam, the mania can come back, and the momentum traders will pile in. This is a pure momentum play and the chart is looking parabolic again.  

On the upside, next resistance comes at around $7,300, last September’s high, before the $8,000 round number, which is a massive target. 

However, the market does increasingly look overbought, which could precipitate a pullback. 14-day RSI is close to 90 – I.e. extremely overbought. We note that in April when the RSI was last at this level it did presage a pullback, only a very temporary one. Price action has now extended well north of the upper Bollinger band.

FX quiet

FX markets remain remarkably calm. EURUSD has cemented its gains above 1.12 but remains trapped within the downwards triangle. GBPUSD doesn’t want to move very far from the 1.30 level. Little real bid for the yen despite it being the main risk-off proxy