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Europe set to rebound, but tensions persist

European equity markets endured a severe sell-off yesterday as global investment sentiment continues to be weak.

There are several factors playing into the mix. The political stand-off between Rome and Brussels continues as the EU commission have rejected the budget proposal from the Italian government. The administration in Rome will have to resubmit its proposals, but Prime Minister Conte has already made it clear there is no ‘plan B’. Dealers are bracing themselves for the prospect of higher yields on Italian government bonds, and that could keep pressure on the Italian banking sector. The last thing the EU want is another round of the eurozone debt crisis, but if they don’t cut Italy some slack, they could trigger another major sell-off in the region.  

Trade tensions between the US and China persist and it is also adding to the bearish sentiment. A Chinese official announced that Beijing are not looking for a trade war, but they do not fear one, and this suggests the country is prepared to dig its heels in over this trade dispute. Yesterday, Caterpillar confirmed that manufacturing costs jumped on the back of the higher steel and aluminium prices due to tariffs, and this underlines how the poor relationship between the US and China is hurting their business. Major US indices endured heavy selling in the middle of the session, but managed to claw back most of their losses and closed only a little lower. Asian markets rebounded overnight thanks to the roller-coaster session on Wall Street Traders will be keeping an eye on the situation in China as there is growing fear the potential liquidation of share-backed loans could add to the downward pressure.

President Trump attacked Jerome Powell, the head of the Federal Reserve, for hiking interest rates. Mr Trump is ignoring the fact that his tax cuts helped spur on US economic growth, which warrant higher rates. The US dollar index is unchanged on the day.

Oil suffered a major fall yesterday after Saudi Arabia declared it will play a ‘constructive and responsible role’ in the energy market. The major oil producer is in the spotlight due to the killing of Jamal Khashoggi, a journalist. Dealers are interpreting the update as a sign that the Saudis won’t curb output and drive the price up. A sudden jolt higher in the oil market could destroy demand for the energy, so it isn’t in their interest to squeeze the price higher. The American Petroleum Institute showed that oil stockpiles jumped by 9.9 million barrels. At 3.30pm (UK time) the Energy Information Administration will reveal the oil inventory figures, and the consensus estimate is for a build of 3.6 million barrels.

The economic health of the eurozone will be in focus today as France and Germany will release the flash manufacturing and services PMI reports this morning. The French manufacturing and services sectors has been growing at a slower pace recently, and today’s reports are expected to come in at 52.4 and 54.7 respectively. German manufacturing has been growing at a slower pace, while the services sector has seen its rate of expansion quicken. The manufacturing reading is anticipated to be 53.4, and the services report is tipped to be 55.5.  

At 3pm (UK time) the Bank of Canada (BoC) will release its interest rate decision, and traders are expecting the rate to be hiked to 1.75%, from 1.50%. The Canadian central bank likes to loosely follow the Federal Reserve, and given that the Fed have hiked three times this year, and there is talk of a hike in December too, no change from the BoC would be a surprise.  

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1618 – the 100-day moving average.

GBP/USD – has broadly been pushing higher since mid-August and if the positive move continues it could target the 1.3300 region. If it remains below 1.3000, it could put 1.2895 on the radar.

EUR/GBP – has been in a downward trend since mid-August, and if the bearish move continues it could retest 0.8725. A break above 0.8880 – 100-day moving average, could bring 0.9000 into play.  

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.50 – 100-day moving average.

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