European stocks are trading cautiously higher on Monday despite the US and China kicked off a new round of mutual tariffs as both countries indicated readiness for resuming trade talks this month. On September 1, the US imposed 15% tariffs on a variety of Chinese goods, while China targeted US crude with 5% duties.
In other news, U.K. lawmakers will bring forward legislation seeking to block the possibility of a no-deal Britain. The opposition Labour party will reveal its legislation plan tomorrow, but the Conservative-led government declines to guarantee it will abide by the new law. There are also reports that Conservative lawmakers have been threatened with expulsion from the party if they join efforts to block a no-deal Brexit.
Against this backdrop, UK’s FTSE 100 adds 1.46 per cent to 7312, Italy’s FTSE MIB gains 1.07 per cent to 21,551, France’s CAC 40 rises by 0.32 per cent to 5,497, while German DAX 30 gains 0.34 per cent to 11,979. The U.S. stock and bonds markets are closed for Labor Day.
In currencies, the greenback demand persists after some hesitations earlier in the day. EURUSD remains under pressure below the 1.10 handle and continues to refresh two-year lows as the expectations for additional stimulus from ECB after German manufacturing PMI came in lower than expected, reinforcing concerns over the state of the region’s largest economy. The dollar also gains amid further recovery in the US Treasury yields ahead of another round of the US-China trade talks. On Friday, the pair dipped to the levels not seen since May 2017 around 1.0960 and registered fresh lows at 1.0957. Should the common currency fail to regain the key 1.10 mark, the bearish risks could increase.
GBPUSD has been losing ground for a fourth day in a row. On Monday, the pair slopped below the 1.21 handle and registered nearly two-week lows around 1.2070 amid the lingering political uncertainty in the UK. The additional downside pressure comes from another weak economic report. In particular, the seasonally adjusted IHS Markit/CIPS UK Purchasing Managers’ Index plunged to seven-year lows of 47.4 last month versus 48.4 expected and a six-and-half-year low of 48.0 seen in July. Amid the Brexit-uncertainty and negative global trade developments, the local companies scaled back production in response to the steepest drop in new order intakes since mid-2012. Technically, the pair needs to get back above the 1.21 level in order to avoid another sell-off in the short term.
In commodities, oil prices have settled around the $59 figure, being unable to regain the bullish momentum after a plunge by 3% on Friday. The upside momentum is called by a new round of US-China tariffs, with market participants so far mostly ignore the reports about the hurricane near the Florida coast that could cause disruption in the US shale oil production should Dorian continue to gain strength further and hurt the oil infrastructure in the region. The futures will be able to get above the $60 handle should dollar demand abates and Dorian-related fears rise in the nearest future.
Nathan Lambert, Head of Global FX Analytical Department