After two weeks of gains European markets slipped back a touch yesterday as the start of the latest round of tariffs between the US and China prompted some minor profit taking in both Europe and the US. The caution shouldn’t be too surprising given that President Trump has already indicated that if China were to retaliate, which they have, to extend the tariff burden on to the remaining $267bn of Chinese imports. That he hasn’t done so yet doesn’t mean he won’t, and investors appear to have taken this as a cue to scale back some risk.
Higher oil prices, on the back of the weekend decision by OPEC and oil ministers not to hike production to offset the loss of Iranian production, also sent Brent crude to a new four year high, breaking above $81 a barrel, and prompting concerns about a short-term supply crunch which could send prices to $90 a barrel.
President Trump has been quite critical of OPEC on a number of occasions in the past few weeks as oil prices have continued to edge higher, blaming them for the continued rise in prices, conveniently ignoring his part in the move higher. When the US reimposed sanctions in August Brent prices had slipped back to $73 a barrel having tried and failed to push through $80 on two previous occasions.
Whatever the rights of wrongs of the decision to reimpose sanctions it has had the effect of removing 3m barrels of output from the global oil supply. Given the cuts to capital expenditure as a result of the slide from $110 in 2014 to the lows of $27 a barrel in 2016, it was always going to be difficult to replace that capacity, at a time when inventories have been declining, and so it has been proved.
The bigger concern given some signs of weakening economic data, is that the rises being seen in prices now could result in demand destruction, as consumers find that higher fuel prices trickles down into less money for consumer discretionary items.
The US dollar index slipped back yesterday ahead of the start of this week’s latest FOMC meeting which concludes tomorrow, and is widely expected to see the Federal Reserve raise rates for the third time this year. The decision this week is unlikely to be a market mover in the traditional sense, however policymaker projections could well be, given the strength seen in recent economic data, and it is here that we could see a move in yields and, or the US dollar.
US consumer confidence, already at an 18-year high, is expected to soften a little in September, coming in at 132.2, down from the big jump we saw in August at 133.4.
The euro also rose to a three-month high against the US dollar on remarks by ECB President Mario Draghi that suggested that the European Central Bank remained on course to raise rates in a year from now. This is in line with what ECB staff projections for inflation outlined at the most recent meeting and aren’t anything new. If anything, core inflation since then those projections were made has been a little on the soft side, suggesting that his comments might be a little premature.
The pound managed to recover some ground after Friday’s heavy losses, despite a lack of positive political developments as calmer words from both the UK and EU side helped stabilise sentiment.
EURUSD – moved back towards the 1.1840 area and June highs. If we break through these levels we could well see a retest of the 200-day MA at 1.1980. A move back below 1.1690 opens up the prospect of a move back towards 1.1620.
GBPUSD – a calmer day after Friday’s heavy falls, but we really need to see a move back through 1.3220 to argue for a return to the 1.3300 area. The larger support remains back towards the 1.3000 level with the 50-day MA at 1.2990. Only a move back below 1.2980 undermines the rally off the August lows at 1.2660, and argues for a retest of these levels.
EURGBP – found support at the 0.8935 area for now, which means an upside bias remains after Fridays rise. The 0.9040 remains a key level which while it caps keeps the upside limited. A move below the 0.8920 area opens up a move towards the 0.8840/50 area.
USDJPY – while the 113.20 level caps we could see a drift back to the 112.00 area. A move below 111.80 opens up a return to the 111.20 area where we the main cloud support area.
FTSE100 is expected to open 8 points lower at 7,450
DAX is expected to open unchanged at 12,350
CAC40 is expected to open 11 points lower at 5,465
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