market relief

Equity markets are under serious pressure after President Trump revealed his plans to levy tariffs on imported steel and aluminium. 

Europe

The decision is part of Trump’s ‘make America great again’ campaign, but traders fear it could trigger a trade war. Whenever a country slaps levies on imports, it is often met with a similar response from other countries, and this is where the selling pressure is coming from.

The FTSE MIB is one of the worst performing markets in Europe ahead of Sunday’s general election in Italy. Political opinion is divided in the country, and the polls are pointing to no clear winner. The markets are essentially pricing in a hung parliament. Dealers will be keeping an eye on the Eurosceptic Five-Star Movement, as their success could greatly shake investor confidence in eurozone stocks, and the euro itself. 

US

US indices are lower on account of the possible trade war. As of next week, Donald Trump wants to start imposing a 25% tariff on steel imports and a 10% tariff on aluminium imports. Investors are worried the likes of China or the EU might start slapping on similar tariffs on American imports. Protectionist policies can have a short-term positive effect, but they could also potentially pave the way for longer-term problems. Mr Trump is known to be forthright, and is unlikely to back down, so this could be the beginning of a protracted trade war. The talk of interest-rate hikes from the Federal Reserve will be put on the backburner for the time being.

The University of Michigan consumer sentiment reading jumped to 99.7, up from 95.7. It was the second highest reading since 2004. It seems odd that sentiment is high, but recent retail sales and durable goods don’t measure up.

FX

What a difference a day makes. Yesterday, in early trading the US dollar index hit a 10-week high, but it quickly turned around after Mr Trump announced his new trade plans. The greenback has come under pressure as chatter of a trade war is doing the rounds. Dealers will be putting possible interest-rate hikes to the back of their minds, and focusing on US trading relations.

EUR/USD is been helped by the weak US dollar. The eurozone announced some economic indicators that were not too hot, but the slide in the greenback overpowered these European announcements. German retail import prices slid to 0.7% from 1.1%, meeting estimates. Italian GDP in the fourth-quarter was 1.6%, down from 1.7% in the previous year.

GBP/USD is slightly higher on the session, largely down to the soft US dollar. Volatility picked up when Prime Minister May mapped out her plans for Brexit. We have heard much of it before, and there wasn’t much for traders to latch on to. Mrs May made it clear the UK would like a deal that is geared to its unique needs. The PM once again stated that ‘no deal was better than a bad deal’, which could prove to be costly.

Commodities

Gold has been given a boost higher on account of the weak US dollar. It is a double victory for gold as the prospect of a trade war in involving the US has dented the dollar and global stocks, so gold is benefiting from the flight-to-quality effect too. The metal is likely to stay in demand while the trade war talk is in circulation, and we could see gold test the recent high of $1,340.

WTI and Brent Crude oil are in the red as traders are still concerned about over-supply, even though OPEC output fell to a 10-month low. The problem with OPEC curtailing their production levels is that it encourages higher output elsewhere. The overall impact is the worries about excess stockpiles and that future supplies remains high. Output in the US is at record levels and while WTI and Brent Crude hang around current prices, we could see even higher production levels being reached. 

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