The reported decision by President Trump to delay tariffs on auto imports from the EU, as well as elsewhere, prompted a sharp turnaround in European markets yesterday afternoon, enabling them to close higher for the second day in succession and helping to complete the reversal of the sharp falls seen on Monday.
Unsurprisingly the German auto makers of Porsche, Daimler and BMW helped lead the way, as concerns about a third front on trade being opened up by the US was delayed by six months. While this is welcome news, it certainly doesn’t mean that the standoff has been averted, and it still has to be confirmed for certain by the president himself. It merely means that the US administration is running out of bandwidth given that the US is already at odds with China and Iran, in other disputes. It’s probably a case of not wanting to be fighting too many battles at once.
As if to reinforce this, President Trump last night signed an executive order to protect US networks from foreign spying, paving the way for a ban on China’s biggest telecoms provider, Huawei. This executive order appears to have curbed some of the exuberance of the late rebound in stocks yesterday, with Asia markets reacting much more cautiously. While the suspension of auto tariffs is welcome, it certainly doesn’t mean that President Trump can’t create ripples in other ways, and this is reflected in the more mixed reaction among Asia markets. This in turn is expected to translate into a lower European open later this morning
It wasn’t such a good day for the Italian FTSEMib, which finished the day lower, as concerns about Italy’s economy have started to emerge back on to the radar. With EU elections next week, Italian deputy prime minister Matteo Salvini has been stirring the pot when it comes to pledging to break EU fiscal rules, saying that they would do so irrespective of whether the EU agreed or not. This prompted Italian yields to push higher and stocks to struggle.
With the Italian government looking increasingly fractious, with growing divisions between Salvini and Five Star leader and other deputy PM Luigi di Maio, there are rising concerns that the government might collapse, which in turn might bring about the prospect of a new election in September. If that were to happen, Salvini might end up in a stronger position than he is now.
US markets also had another good day led by the Nasdaq and Fang+ index, which both rose in excess of 1%. The rebounds on the Dow and S&P 500 were much more modest, tempered somewhat perhaps by disappointing industrial production and retail sales data for April, both of which fell well short of expectations. The weakness of the US data has raised concerns that, despite a resilient labour market and decent wages growth, the US economy may be starting to slow quite significantly.
At a time when the Chinese economy is also showing little sign of a significant pick up in economic activity it is perhaps not surprising that investors are starting to hedge their economic bets.
Both US and German yields remained under pressure as money flowed into bond markets, while gold prices also managed to hold onto their recent gains. It is clear that despite the rebounds in equities over the last couple of days that some investors are hedging against further losses.
The pound has come under continued pressure in recent days on speculation that the ongoing Brexit talks will eventually die of old age. The prime minister is also set to come under pressure to name a departure date when she meets the 1922 committee later today, irrespective of how badly the Conservative Party does at next week’s EU elections, and any intended fourth vote on the Brexit Withdrawal Agreement goes.
EUR/USD – continues to trade sideways below the 1.1270 area which is containing the upside for now, with wider resistance at the 1.1325/40 area and the April peaks. The bias remains to the downside, and the lows at 1.1110, while below this key resistance level.
GBP/USD – the pound has continued to struggle slipping down through the 1.2960/70 area, as well as moving down through the 1.2860 area. The next target is the February lows at 1.2760, with 1.2800 also a key support. We need a move above 1.3070 to stabilise.
EUR/GBP – having moved up through the 0.8720 area, the risk is for a move towards the 200 day MA up near the 0.8800 level. We need to hold above the 0.8680 area for this to play out or run the risk of a move back down to the 0.8620 area.
USD/JPY – appears to have found a short term base at the 109.00 area for now but the risk still geared for further declines towards the 108.00 area. It would need a recovery back above the 110.30 area to stabilise and signal a move back towards 111.00.