Having seen a strong rally on Thursday on the back of the European Central Bank’s caution over future rises in interest rates, markets in Europe slipped back a little on Friday as it became apparent that a trade war between the US and China had taken a significant step closer.
Despite the late falls on Friday it was still a fairly positive week for European stocks but the announcement of $50bn of tariffs on Chinese goods by the US, starting on 6 July, did weigh on markets heading in to the weekend, with US markets also finishing lower, albeit off their lows of the day.
Unsurprisingly the US’s actions brought about a swift counter response from Beijing over the weekend as China announced $34bn worth of tariffs on a range of US goods including pork, soybeans and corn which will see an extra 25% put on these and a range of other US agricultural and automobiles.
This may not be the end of the matter with the US administration looking at an additional $100bn worth of tariffs which could affect future Chinese investment into the US.
Nonetheless while markets did finish on the back foot, and the threat of further escalation remains a possibility, the amount of the tariffs in the wider scheme of things is still quite small in economic terms, in the short term at any rate, which may help explain why we could well see markets in Europe trade only modestly lower on the open this morning.
Sentiment may deteriorate further if these trade frictions start to become embedded or even get worse as they will act as a drag on a global economy, already showing signs of some softness.
Worries about the pace of rising oil prices have also been causing concerns with OPEC under pressure to raise production levels at this week’s meeting in Vienna. There does appear to be some resistance to this from some smaller OPEC nations, as well as Iran, however Saudi Arabia and Russia could find their way to releasing the taps a little, if only to prevent an oil price spike triggering a bout of demand destruction, and this has seen oil prices fall further in Asia this morning.
Politics could also take centre stage this week with further Brexit angst likely as UK Prime Minister Theresa May comes under pressure from pro-Remain MP’s determined to head off the prospect of a 'no-deal' Brexit in a vote later this week.
Theresa May isn’t the only political leader with problems this week with German Chancellor Angela Merkel under pressure from her coalition partners the CSU over her refugee and immigration policy, which could collapse her government if a compromise isn’t found. Interior minister and CSU leader Horst Seehofer has threatened to impose his own refugee plans in defiance of the Chancellor almost daring her to sack him in an effort to force a solution and bring the matter to a head. If this were to happen the only recently formed German government could well collapse.
It seems the German Chancellor’s penchant for procrastination which has served her so well these past few years is about to face another key test and this time she may find out it much more difficult to defer any awkward decisions.
EURUSD – appears to be finding support just above the May lows at 1.1520, as well as trend line support from the 2017 lows, with the current rebound potentially suggesting a move back towards the 1.1720/30 area. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – has found support at the previous lows just above the 1.3200 area. A break below 1.3200 opens up a test of the trend line support from the 2017 lows which comes in around the 1.3100 area. The current rebound needs to get back above 1.3460 to stabilise and retarget the 1.3620 area.
EURGBP – still range bound with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.
USDJPY – appears to be struggling near the 111.00 area with resistance behind that at the May highs at 111.30. Support comes in at the 109.50 level.
FTSE100 is expected to open 8 points higher at 7,642
DAX is expected to open 10 points lower at 13,000
CAC40 is expected to open 6 points lower at 5,496
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