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Trade war tensions keep markets cautious; Italy election results come in

Last week’s decision by US president Donald Trump to impose large tariffs on steel and aluminium look set to continue to reverberate into the upcoming trading week, after EU Commission president Jean Claude Juncker said that the EU could consider similar tariffs on iconic US brands like Harley Davidson, Levis and Bourbon, saying that the EU could “do stupid” too.

In response, President Trump then suggested that the US would increase tariffs on EU exports of cars into the US.

The reaction of equity markets in the hours after President Trump’s announcement gives an indication as to what might happen next if these exchanges turn out to be the opening shots of an escalating trade war. Early indications would appear to suggest that the US is playing the long game as it becomes clear that there won’t be any exemptions to the tariff measures.

While US markets managed to recover their intraday losses on Friday they still finished the week lower, European markets fared worse with the FTSE 100 and German DAX closing below their February lows, and close to one year lows.

The last few weeks have already seen investor confidence take a hit as a result of recent volatility over concerns about rising inflation. An increase in tariffs has the potential to leak through to higher prices, as well as lower profit margins, and could well herald a sharp slowdown in a global recovery which already appears to showing signs of plateauing. These fears about higher prices prompted US yields to rise sharply on Friday even though they finished the week more or less unchanged from the week before.

On the politics front the German SPD membership voted to ratify their leader’s coalition deal with Angela Merkel’s CDU and signalling another 4 years of the status quo in Europe’s largest economy, thus signalling the end of five months of haggling to get a new German government, and pushing the euro to a one week high in Asia trading.

One of the Chancellors first tasks will be to help craft a response to the current trade tensions between the US administration and the EU, and in particular the threat to the German car industry from President Trumps threat to increase taxes on US car imports, which are currently set at 2.5%.

Having taken five months to get a new German government attention now turns to the Italian election and the creation of a new administration there, which has the potential to make the recent German political discussions look like a tea party. Difficult politics is nothing new in Italy, however given concerns about immigration and a sclerotic economy, the political landscape is significantly more complicated than it was at the last election.

Based on initial indications it would appear the euro sceptic parties have managed to obtain at least 50% of the votes with anti-establishment Five Star being the largest party with up to 32% of the vote, while the Northern League are also expected to make big gains. As a slap in the face to the traditional parties in Italy the verdict from the Italian public could have not been more scathing as the prospect of forming a stable government looks to be a formidable task.

On the data front we’ll get to see the latest snapshot of the services sector for February having seen a little bit of a slowdown in the manufacturing sector numbers last week.Spain, Italy, France and German services PMI’s are expected to come in slightly lower than the January numbers at 56.5, 57.3, 57.9 and 55.3 respectively.

In the UK the latest services numbers for February are expected to show a slight improvement to 53.3, from January’s 53, though the recent icy cold weather may well have impacted on economic activity towards the end of the month.  

EURUSD – Friday’s rebound off the 1.2150 area has continued to gain traction overnight with a move through 1.2370 targeting a move to the 1.2420 area and possibly the recent highs above 1.2500. Only a move below 1.2150 support targets a move towards 1.2000.

GBPUSD – continues to look weak with a low of 1.3710 last week, with the risk we could move towards the 1.3650 area. We need to see a move back above 1.3840 to stabilise, and argue for a return to the 1.3980 area.

EURGBP – pushed up to its highest levels this year last week, edging above 0.8930 with the next resistance at the 0.9020 area. Support now comes in at the 0.8920 level, and below that at 0.8870.

USDJPY – remains vulnerable to further losses but does have support just above the 105.00 area. 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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