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Europe to open lower as Trump ups the ante

European markets slid lower yesterday as escalations over trade caused a decline for the second day in succession, as equity markets gave up their post ECB gains.

Sentiment wasn’t exactly helped by the arrest of the CEO of VW’s Audi operation, as part of the “dieselgate” investigation by authorities in Munich, which saw the share prices of German car makers fall heavily with the VW share price heading towards its lowest levels since last November.

While it is easy to argue that a lot of yesterday’s sell-off is tariff related and in particular China’s retaliation to last week’s US tariffs, the narrative appears to be one of concerns about escalation, and how the US administration will react as well as concerns about a spill over extending to the EU as well as the stalled NAFTA talks with Canada.

It still remains unclear what effect further tariffs will have in the wider scheme of things, given that in the context of the wider global economy they represent in monetary terms no more than a flea bite, however tensions are rising that the US may well overplay its hand in the coming days and weeks. 

Yesterday’s equity market reaction was in sharp contrast to the action in bond markets which could only be described as a snoozefest , however things have changed overnight after President Trump upped the ante by threatening another $200bn worth of tariffs at a 10% rate on a whole new raft of Chinese goods and services, if China went ahead with their retaliation measures.

This upping of the ante saw markets in Asia slide and unlike yesterday haven bond markets rallied as US treasury yields slid back, the Japanese yen gained and gold rallied. As such European markets look set to continue their losing streak and open lower.

The pound came under further pressure yesterday languishing close to last week’s seven month low against the US dollar ahead of this week’s Bank of England rate decision, where policymakers will have to decide whether the economy has improved enough to keep the prospect of a rate rise later this year on the table. There is also likely to be some debate as to whether the recent decision to hold rates was the right decision, given that since that April IMF meeting when Governor Carney indicated that a rate hike wouldn’t happen, the pound has slid 6% against the US dollar. This is unlikely to be well received by those companies who are susceptible to imported inflation.

The euro found some elements of support yesterday after German Chancellor Angela Merkel bought herself some time with respect to her rift with her CSU allies around the immigration border issues, while investors will be keeping an ear on ECB President Mario Draghi’s comments at the European Central Bank conference at Sintra in Portugal, where he could either reinforce last week’s dovish guidance on European interest rate expectations, or row back from it slightly.

Speculation about oil prices continued yesterday on reports that Saudi Arabia and Russia might look at raising output by between 300k and 600k barrels a day, well short of expectations of a 1m barrel a day increase that markets were looking to price in. This saw Brent prices reverse course sharply, after Friday’s declines, helping stem some of the FTSE100’s losses, though US prices lagged behind over concerns about Chinese tariffs on US oil imports.

EURUSD – appears to be finding support just above the May lows at 1.1520, as well as trend line support from the 2017 lows, with the current rebound potentially suggesting a move back towards the 1.1720/30 area, with resistance also at 1.1640. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.

GBPUSD – has found support at the previous lows just above the 1.3200 area. A break below 1.3200 opens up a test of the trend line support from the 2017 lows which comes in around the 1.3100 area. The current rebound needs to get back above 1.3460 to stabilise and retarget the 1.3620 area.

EURGBP – still range bound with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – appears to be struggling near the 111.00 area with resistance behind that at the May highs at 111.30. Support comes in at the 109.50 level.

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