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US, China trade war deferred for now

European markets managed to close higher for the eighth week in succession last week despite the Italian market suffering a large weekly fall on the back of concern about the prospect of a new populist coalition government between Five Star and the League.

Italian borrowing costs also pushed sharply higher back above levels last seen in the middle of last year, with the 10-year yield pushing above 2.2%, up over 50 basis points in the last two weeks alone, as investors became increasingly jittery as to what sort of measures any new Italian government might take, ahead of an announcement today, that should see a new cabinet proposed to Italian President Mattarella.

The continued buoyancy in European markets is being helped in no small part by the weakness in both the euro and the pound against the US dollar, while concerns about an escalation in tensions between China and the US appear to have been deferred in the short term after progress in trade talks at the weekend, which saw US Treasury Secretary Steve Mnuchin announce the suspension of $150bn worth of tariffs on Chinese imports until further notice, after it was claimed that the parties were in discussions that would see China could “significantly increase purchases” of US goods.

This deferral of tensions should see markets in Europe get off to a positive start this morning with the FTSE100 on course to open at a record high.

While a US clash with China appears to be receding in the short term, one with the EU could be coming a bit closer with the 1st June deadline on its own exemption approaching as well as the frayed relations with respect to relations with Iran, after the US pulled out of the nuclear deal. The EU has been looking at measures to help European companies circumvent US sanctions, which implemented would mean a much greater likelihood of a falling out.

US markets on the other hand continued to be restrained by the stronger US dollar as well as higher valuations, as they finished the week lower. The increase in bond yields, along with rising expectations of multiple rate rises appears to be bearing down on valuations, however the weekend deferral of Chinese tariffs might help act as support in the near term for US equities.

Concerns over rising bond yields are one of the key factors driving some of the recent caution along with rising oil prices. It is no secret that the US consumer remains particularly sensitive to fuel prices, and with the US driving and holiday season now about to get under way an increase in gasoline prices will weigh on consumer demand. The rise in prices won’t be particularly welcome for airlines either, as they look to take advantage of holiday season, and the worry is that with Brent crude prices at $80 a barrel, the tipping point at which demand destruction becomes a worry could well be a lot closer than people think.

Last week’s rise in US yields to multiyear highs, along with the continued advance in the US dollar on rising rate expectations could see further upside this week when we get the latest FOMC minutes and determine whether policymakers have concerns about the Q1 slowdown in the US economy and whether the recent rises in oil prices are giving them any concerns about consumer spending.

EURUSD – remains under pressure raising the prospect of further losses towards the December lows at 1.1710 and even the 1.1600 level. With the 200-day MA now starting to roll over the prospect of further losses looms large, while below 1.2000.

GBPUSD – slipped below support at the 1.3450 level the lack of any rebound suggests that we could well head lower towards the 1.3300 level. We need to overcome the 1.3620 area to stabilise and argue for a move towards 1.3720.

EURGBP – last week’s failure at the 0.8845 level and the 200-day MA at 0.8880 keeps the onus on the risk of a return towards the 0.8690 level, and even the recent lows at 0.8640. Still range trading.

USDJPY – the prospect of further gains towards the 112.00 area continues to be a possibility while above the 110.00 area and the 200-day MA. Only a move below the 109.70 area undermines and risks a return to the 108.70 area.

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