EU-US trade tensions ease
US equities had a great deal of relief on news that the US and the EU are holding off from implementing new tariffs and will start negotiations. Both parties confirmed their willingness to reduce tariffs while European Commission President Jean-Claude Juncker pledged to increase imports of natural gas and soybeans (which is subject to a 25% tax by China). In return, the US should reassess duties on steel and aluminum that it introduced earlier to the EU. As a reminder, steel and aluminum tariffs were imposed in 23. March to China and 1. June 2018 to EU, Mexico and Canada.
Overnight, US equities were heading higher, the DJIA rose by +0.68% while S&P500 and Nasdaq increased by +0.91% and +1.17% respectively. The Nasdaq-100 Technology Sector Index is approaching its historical high of 4496.59 (12/03/2018), currently given at 4414.50. On European side, markets are recovering from yesterday’s loss, led by the DAX +1.40%, Euro Stoxx 50 +0.65%, CAC40 +0.65% and SMI +1.10% while FTSE 100 is neutral, thus announcing a good market session for the day.
However, despite current sentiment of relief on the marketplace, we remain skeptical that the trend will sustain. Indeed, Trump remains hard on China and no agreement is signed with the EU. The move could also be a political maneuver to maintain strong ties with his supporters amid November US Congress midterm elections and in order to stay above water – as resistance is felt from public opinion and inside the Republican Party.
Showing some strength in yesterday late session, the USD is currently trading sideways against major currencies. Today’s loss against JPY (-0.25%) is expected to reverse in the afternoon. The pair is currently trading at 110.70 and heading towards 111.
All eyes on ECB meeting
Now that Trump and Juncker are friends again, as they pledge to deescalate the trade crisis, the spotlight will inevitably fall on today’s ECB meeting. Even though the agreement triggered a relief rally in the equity market, the lack of reaction in the FX market suggest that the EU-US dispute was not the market’s biggest worries. China remains the main target.
The last batch of PMIs for the euro zone, together with the Trump-Junker “cease-fire” agreement, mean that Mario Draghi will likely feel relaxed for today’s meeting. Nevertheless, we do not expect a ground breaking announcement as Draghi already set out his plan during the June meeting. Therefore, the attention will focus on the council’s view of the economic outlook as well as inflation development. Since the June meeting, investors have reviewed there expectations to the downside and do not expect the ECB to hike interest rate before at least summer 2019.
The single currency appreciated yesterday evening with EUR/USD climbing 0.60% to reach 1.1740. Since then the pair has been erasing gains slowly as investors preferred to remain cautious. Historically, Draghi’s speeches have never been euro positive. There is no reason for it to change today.
