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Trade tensions set to keep markets on edge

European equity markets look set to start the new week in the same manner that they finished last week, firmly on the back foot.

US markets underwent another disappointing session closing at their lowest levels this year, with the S&P500 and Dow both closing very close to their 200 day MA’s, and this poor finish is likely to weigh on markets in Europe today.

With markets in Europe and the Nikkei 225 already below their long term 200 day averages, a similar technical move in US benchmarks could well trigger further substantial global stock market weakness.

The German DAX managed to close just above its February lows at the end of last week, however it was still its weakest finish in over 12 months. Friday’s sell-off in the US looks set to translate into a weaker open today, across all of Europe as concern about an escalation n tensions between China and the US over trade, prompts further widespread uncertainty.

It would appear that any relief that European equity investors may have felt from President Trump deferring his threat of tariffs on the EU last week only manifested itself in pushing the euro higher to the detriment of European stock markets.

As we come to the end of this first quarter of 2018 all of the optimism that we saw at the end of January now appears to be an almost distant memory, and it will need a significant change of tone to prevent stock markets finishing this quarter lower, despite this year’s record highs.

China’s initially measured response to last week’s announcement of tariffs to the US administrations announcement does appear to offer some hope in terms of a possible stabilisation this week, but sentiment is likely to remain volatile, particularly if Chinese authorities follow up with further large scale measures which target, larger US corporations like Boeing or Apple. US treasury secretary Steve Mnuchin’s comments at the weekend that he was cautiously optimistic that a US agreement with China could be reached also offers hope that some form of accommodation can be reached in the coming days or weeks.

The speed of the declines seen in the past two weeks are certainly a far cry from all the recent optimism about global growth that we saw from bodies like the OECD and the IMF at the beginning of the year, and it appears to be a change in sentiment which is likely to be very difficult to turn around, particularity where equity investors are concerned.

Central bank guidance remains one of cautious optimism if last weeks Fed decision is any guide, as they look to tighten further in the months ahead, however the overriding narrative at the moment is one of tension around future trade relations between the various global trading blocs, at a time when recent data out of China and Europe has been slightly softer.

At the beginning of the month President Trump indicated that he would implement tariffs in a “ loving way”, maybe in an attempt to suggest that he didn’t want to spook equity investors. If recent price action is any guide markets are clearly not “loving” what is happening right now, which is also being exacerbated by rising concerns that the tech sector, which has driven most of the gains in US equity markets, could be on the cusp of being clobbered by increasing regulation, as well as possible taxation changes. 

This week’s key events, away from the politics are final iterations of UK and US Q4 GDP and the latest US PCE inflation numbers which are expected to remain benign at around 1.6%.

EURUSD – moved back to just shy of 1.2400 last week before slipping back however it continues to remain support above the 1.2250 level. We need a concerted break above 1.2370 to target the 1.2420 level. A push below 1.2250 retargets the 1.2160 area.

GBPUSD – pushed up to 1.4220 last week just shy of trend line resistance from the 2014 highs. A move through 1.4220 retargets the 1.4350 highs. As long as this level holds we could drift back down to the 1.3980 area. A move below 1.3970 runs the risk of a return to the lows last week.

EURGBP – fell to an 8 month low at 0.8667 last week before rebounding. As such we still seem range bound with the potential for a short squeeze to 0.8820. We need to see a move back through 0.8820 to retarget the recent peaks above 0.8920.

USDJPY – slid below the 105.20 area, and now has the potential to open up further losses towards 103.00, and eventually the 100.00 level. We need to push back through the 105.50 area to stabilise. 

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