European equity markets finished lower yesterday as sentiment was soured by the comments from President Trump in relation to trade with China.

The US president warned that the levy imposed on $200 billion worth of Chinese imports could be upped to 25% from 10%, and another round of tariffs could be launched. Investors in Europe have already been dealing with the uncertainty in relation to Brexit and the Italian budget, and then US-China relations deteriorated ahead of the G20 summit later this week. It is possible that Trump is dialling up the rhetoric as a way of trying to put pressure on China ahead of the meeting.

After the European close there was a change of sentiment in relation to China. Larry Kudlow, director of the national economic council, said he had been holding meetings with Chinese officials of all levels, and he felt there is a ‘good possibility’ the two sides will come to an agreement. The major US indices finished higher last night, and stock markets in Asia rallied too.

Richard Clairda, of the Federal Reserve, repeated his view that he feels we are close to the neutral rate, and he thinks that any additional interest rate hikes should be done gradually. The central banker helped temper the US dollar and traders’ expectations in relation future rate hikes a few weeks ago, and he is sticking to his original view. James Bullard, St Louis Fed president, expects slower growth, and said it might be ’tougher’ for the Fed to raise rates over the next two years. The US dollar index pushed higher yesterday despite the slightly dovish commentary from the central bankers.

At 1.30pm (UK time) the US will release the second estimate of the third-quarter GDP reading, and the consensus estimate is 3.5%. Jerome Powell, the head of the Fed, will be speaking today at 5pm (UK time) and traders will be tuning into to see is hid speech his hawkish or dovish.  

Sterling lost ground yesterday as MPs tore into Theresa May’s withdrawal agreement. Michael Fallon, former defence secretary, stated the ‘deal is doomed’. The DUP, who are helping Mrs May stay in power made it clear they won’t back the Prime Minister. The EU said over the weekend that it a take it or leave it situation, and seeing as there appears to be very little support for the deal, we could be heading for no-deal scenario. Putting the politics to one side, traders are fearful the UK will leave the EU without a deal in place, and the more likely we are going to arrive at that situation, sterling could fall further.

The Bank of England stress test will be announced today. UK focused banks like Lloyds, RBS, Barclays and CTBG will be in focus as traders will want to see how the groups would potentially cope under the various Brexit scenarios. The prospect of a no-deal situation is likely to hurt the banking sector, and the report should give us a good idea of how the banks would potentially cope.  

Oil fell again yesterday as dealers are still worried about excess supply. Saudi Arabian output is at a record level, and US oil stockpiles have been rising. Last night, the American Petroleum Institute revealed their latest figures, and inventories jumped by 3.45 million barrels. At 3.30pm (UK time) the Energy Information Administration will reveal their inventory report and dealers are expecting a build in stockpiles of 769,000 barrels. OPEC are due to meet next week and, they are tipped to announce a production cut, but given that Saudi Arabia are under pressure from President Trump, some dealers are doubtful about the size about  of the potential cut.

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance at 1.1548 – the 100-day moving average.

 

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