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Resilient markets shrug off trade war concerns, for now

Having slid sharply at the back end of last week over concerns about a the prospect of a trade war, European and US markets bounced back strongly yesterday, though Italian markets were the exception, slipping back as the prospect of several weeks of political gridlock loomed in the wake of the weekend election result.

In an act of perfect symmetry, as German politicians finally drawing a line under five months of their own political trials and tribulations, and forming their own government, Italy picked up the baton of political uncertainty as Italian voters gave two fingers to their own political establishment by voting for parties who by their very nature are avowedly committed to shaking up the status quo.  

Despite this, market reaction while negative was fairly measured, largely due to the fact that dysfunctional Italian politics isn’t really anything new. That being said, the current arithmetic doesn’t invite a lot of optimism that a functional Italian administration will emerge quickly once all the votes have been counted. If anything it could take months for the shape of any new administration to emerge given that both Five Star and a Lega coalition are claiming that they have the right to attempt to form an administration.

One thing seems certain, while in the short term little will change in Italy, the problems in the Italian economy, as well as the banking system, are likely to remain unresolved and in the event of the next crisis are likely to be that much harder to fix.

Equity markets also managed to shrug off concerns about a possible escalation in the various threats of trade wars, after some tweets from President Trump that suggested that his threats to slap on tariffs were part of his strategy to speed up progress in the ongoing NAFTA talks.

While this may well be true investors might be missing the bigger picture in that this could merely be the start of President Trump’s attempts to upend the status quo on global trade in an attempt to make it work better for the US economy.

Time will tell if that is the case but for now in the wake of last night’s US rebound, markets in Europe look set to open higher this morning, with the DAX and FTSE 100 both rebounding from one year lows yesterday.

The pound had a good day yesterday after the latest services PMI number for February completed a decent month for economic activity for the UK economy, along with optimism that some form of transition deal could be announced in the coming weeks, after comments from Prime Minister Theresa May that a transition deal might be close.    

EUR/USD – tried to break above the 1.2370 level yesterday but drifted back. We need to a move through 1.2370 to target a move to the 1.2420 area and possibly the recent highs above 1.2500. Support remains back near last week’s lows at 1.2150

GBP/USD – yesterday’s move back above 1.3830 raises the prospect we could creep back towards the 1.3980 level. The 1.3710 area and last week’s low remains a key support area with the risk we could see a move towards the 1.3650 area.

EUR/GBP – pushed up to its highest levels this year yesterday at 0.8952 but was unable to maintain traction slipping back down again with a break back below 0.8870 arguing for a return to the recent lows back at the end of February at 0.8810.

USD/JPY – has managed to find a bit of base at the 105.20 area with a move back through the 106.30 area arguing for a move back to the 107.20 level. A move below 105.00 targets the 100.00 area. We need to move above the 108.30 area to stabilise.

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