Stocks slide after early gains; GBP moving higher

Summary:

• US indices pullback from ATHs on trade headlines

• GBP edges higher as Tories extend lead in polls 

• PBOC keeps loosening policy despite elevated inflation

It’s been a fairly eventful start to the week for US indices with the S&P500 futures hitting their highest ever level before experiencing a fairly swift move lower ahead of the cash open. With a thin economic calendar and earnings season winding down any sharp moves were always likely to come from trade headlines and this has proven to be the case. A tweet from Eunice Yoon, a senior Beijing correspondent for CNBC has poured some cold water on market sentiment and serves once more as a reminder that for all the positive noises on the US-SIno trade front in recent months, this situation remains far from remedied.

US benchmarks ended last week at their highest ever levels with a strong rally into the weekend and even though doubts remain on trade, the price action has been anything but bearish. Even the selling seen this afternoon has been fairly measured and the markets trade only around 10 points from their all-time highs - which were made earlier today at 3127. Even after the dip the S&P500 is back around the level it ended last week and set for a record opening price.

The pound has begun the new week on the front foot after the latest election polls showed the Conservatives extending their lead over Labour, boosting the currency back near the $1.30 handle to trade at its highest level since the start of the month. News on Friday that the Brexit party would not contest further seats has come as a positive for the Tories and with just over 3 weeks to go until the election they continue to hold a strong lead of around 15% in most opinion polls.

The People’s Bank of China lowered on Monday its 7-day reverse repurchase agreement rate by 5 basis points to 2.5%, the first such reduction since 2015. Along with this rate cut, the Chinese central bank also injected 180 billion yuan of cash into the financial system via open market operations in order to alleviate liquidity concerns. Moreover, it is worth remembering that this cut came just two weeks after the PBoC cut its medium-term lending facility rate, the mechanism used by lenders for longer-dated funding needs. As one may notice at the chart below, the monetary authorities in Beijing have recently decided to lower borrowing costs trying to help its faltering economy. Nevertheless the PBoC’s strategy has not been successful thus far because the weighted average loan interest rate has been climbing since the beginning of 2017.