European equity markets lost a little ground yesterday on concerns that trade tensions between the EU and the US could tick up.
President Trump claimed the EU has ‘no choice’ but to negotiate a new trade deal with the US. It is no secret that Mr Trump is putting America first, so he could give Brussels the same treatment he dished out to China in a bid to rebalance the trading relationship. Also, a trade spat with the EU could score him political points, which would come in handy seeing as he is up for re-election in November.
The FTSE 100 was hit by the rise in the pound. At the back end of last week there was ramped up speculation about the possibility of the Bank of England cutting rates later this month. Until recently the markets were pricing in a 70% change of a rate cut, but respectable jobs data on Tuesday combined with an improvement in the CBI industrial orders expectations report yesterday altered some traders’ outlook. The CBI update improved from -28 to -22, which was a five month high, and in turn the markets started pricing in only a 50% chance of an interest rate cut. The inverse relationship between the pound and the FTSE 100 played out yesterday.
Concerns about the coronavirus influenced markets too. Parallels have been drawn with the SCARS crisis in 2003, but Beijing’s handing of the situation seems to be more open this time, so the fear factor isn’t too bad. Should the situation get worse, stocks in the tourist trade could suffer.
Overnight, stock markets in Asia lost ground as the health fears stepped up. It was reported the death toll in China has reached 17, and nearly 600 have been infected, hence why equities fell.
The mildly negative sentiment in Europe yesterday wasn’t passed on to the US seeing the S&P 500 as well as the NASDAQ 100 posted record highs. It would appear the bullish sentiment on Wall Street can’t even be stopped by the possibility of a health crisis in China. The US housing sector is in good shape as the existing homes sales report showed 3.6% growth in December, easily topping forecasts.
The Bank of Canada (BoC) kept rates on hold at 1.75% meeting forecasts. The BoC chief, Stephen Poloz, said the door was open to a cut should the economic slowdown continue. Household debt levels are high so the central bank doesn’t want to encourage much more borrowing, but at the same time uncertainty exists in the global economy. The Canadian dollar fell on the back of the update.
At 12.45pm (UK time) the European central Bank (ECB) will release its interest rate decision, and the refinancing rate is tipped to hold steady at 0.0%, while the deposit rate is expected to stay at -0.5%. We could hear calls for fiscal stimulus to help the region emerge from its economic malaise.
The US jobless claims rate is expected to tick up to 215,000 from last week’s 204,000. The report will be posted at 1.30pm (UK time).
The Energy Information Administration will post the latest inventory data at 4pm (UK time). Oil stockpiles are expected to drop by 1.34 million barrels, while gasoline inventories are tipped to jump by 3.2 million barrels. Keep in mind oil sold-off aggressively yesterday after Fatih Birol, the head of the International Energy Agency, claimed the energy market would suffer from oversupply in the first-half.
EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1068, it might retest 1.1300. A move to the downside might target the 1.1000 area.
GBP/USD – while it holds above the 50-day moving average at 1.3036, the wider bullish move should continue. The 1.3500 area might act as resistance. A break below the 1.2900 area could bring 1.2689 – 200 moving average, into play.
EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8400. A rebound might run into resistance at 0.8600.
USD/JPY – while it holds above the 50-day moving average at 109.14 it could target 110.67. A move to the downside might encounter support at 109.00.
FTSE 100 is expected to open 16 points lower at 7,555
DAX 30 is expected to open 69 points lower at 13,446
CAC 40 is expected to open 33 points lower at 5,978
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