Markets in Europe traded in a positive fashion yesterday, helped in no small part by a weaker euro and pound as the US dollar continued to climb, though markets in Italy proved the exception to that, with stocks there posting their biggest one-day decline since the March election.
Weak EU core inflation also remained near multi year lows, casting doubt around the ECB’s ability to commit to reining back its asset purchase program later this year, helping push the euro to its lowest levels this year.
Concerns about trade appear to be taking a back seat for now despite the WTO ruling in the US’s favour against Airbus (LON:0KVV), giving the Trump administration the option of another stick to beat the EU with in upcoming trade talks, though the EU’s counter claim against Boeing (NYSE:BA) at the WTO could well go the other way in the coming weeks, thus cancelling out this week’s US win.
It is increasingly becoming much more difficult to predict which way the Trump administration will turn with respect to trade given the recent surprising U-turn on the President’s part with respect to China’s ZTE (HK:0763).
It was Teddy Roosevelt who first coined the phrase 'speak softly and carry a big stick' when it came to foreign policy. President Trump appears to be turning that on its head by adopting a policy of shouting loudly at every available opportunity, and occasionally using the stick.
Despite rising US yields, US equity markets did manage to recover some of their Tuesday losses, though not all of them, as investors weighed up the likelihood of another three US rate rises against the likelihood of further gains when valuations appear already quite stretched.
Italian yields hit their highest levels this year on the back of concerns that a new Italian coalition government could upend the status quo in Italian politics with measures like a call for €250bn of debt forgiveness on Italian debt, as well as the prospect of a roadmap to euro exit.
While the anti-establishment parties of Five Star and Lega insisted that the text of the coalition agreement was an old one, the fact that the €250bn amount was there in print, had the effect of reawakening concerns about their commitment to the euro project. This really shouldn’t come as a surprise given that both sides haven’t been particularly shy in the past about admitting their desire to upend the status quo and have new discussions about how to move forwards in a manner that harks back to a pre-Maastricht treaty status quo.
Despite the extent of the selloff in both Italian equity and bond markets yesterday the market reaction needs to be put into the context of where they were just over six months ago. Italian yields closed at their highest levels this year at 2.10%, while the FTSE MIB still remains over 8% higher year to date.
Banks were the biggest fallers in the Italian market over concerns that they would be worst affected by a debt cancellation given that they own over 20% of outstanding Italian debt.
For now the market fallout appears confined to Italian markets, and is likely to remain so in the short term, given that even if they wanted to deliver on their pledges, talking about them is likely to be the easy bit. Getting them implemented is likely to be much more difficult with parliament and the courts likely to be major obstacles.
EURUSD – has slipped below the 1.1800 level hitting the 1.1780 target and raising the prospect of further losses towards the December lows at 1.1710 and even the 1.1600 level. With the 200-day MA now starting to roll over the prospect of further losses looms large, while below 1.2000.
GBPUSD – made a marginal new low at 1.3450 this week but pressure remains on the downside and a move towards the 1.3300 level. We need to overcome the 1.3620 area to stabilise and argue for a move towards 1.3720.
EURGBP – continues to drift lower after the week’s failure at 0.8845 and the 200-day MA at 0.8880 the risk remains for a move back towards the 0.8690 level, and even the recent lows at 0.8640.
USDJPY – finally cracked the 110.00 area as well as the 200-day MA and trend line resistance at 110.30, suggesting the potential for further gains towards the 111.20 area. We need to hold above the 109.70 area for this to unfold or risk a return to the 108.70 area.
FTSE100 is expected to open 4 points lower at 7,730
DAX is expected to open 9 points higher at 13,005
CAC40 is expected to open 13 points higher at 5,580
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