European stock markets grind lower on Tuesday as investors have digested the US-Canada trade deal and shifted their focus to Italy and US-China tensions. In another sign that trade conflicts pose a threat for global growth, International Monetary Fund chief Christine Lagarde blamed trade issues on the potential economic slowdown. Another source of concern for European markets is the potential conflict between the Italy and the EU over the recently unveiled budget that includes a deficit target that is above the EU rules. Against this backdrop, Italy’s FTSE MIB loses 0.31 per cent to 20,545, Britain’s FTSE 100 sheds 0.27 per cent to 7,475, France’s CAC 40 declines by 0.59 per cent to 5,474, while German DAX 30 falls by 0.64 per cent as well, to 12,260. US stock index futures fell as the relief from a reworked NAFTA deal faded and Italy-related worries weigh.
The dollar continues to gain further ground against the European currencies as Italy and Brexit remain in market focus. European Commission vice president Valdis Dombrovskis said today that Italy’s deficit plans are not compliant with EU rules. The ECB member Olli Rehn highlighted that Italy budget deficit poses serious concerns. Meanwhile, Italian deputy prime minister Matteo Salvini noted that his country is ready to ask for damages from EU for upsetting markets with their attack on Italy. Against this backdrop, it’s obvious that the issue has been escalating and could hurt the euro further, especially as the greenback demand gas increased recently due to rather aggressive Fed officials’ comments and the risk-off sentiment in the global financial markets. As such, EURUSD could challenge the 1.15 figure in the near term, though before we could see a local upside correction.
The persistent healthy USD demand coupled with the lingering Brexit uncertainty and the prevailing risk aversion sent the pound further south on Tuesday. GBPUSD broke below the 1.30 figure for the first time since September 10 and registered fresh three-week lows in the 1.2940 area. Additionally, the UK construction PMI came in lower than expected – the index declined from 52.9 to 52.1 vs. 52.5 expected. Now traders shift focus to the Fed Chair Jerome Powell’s speech that could give a fresh impetus to the USD pairs. Should his rhetoric confirm the central bank’s commitment to further gradual hiking, the buck will receive another boost. In this case, GBPUSD will target the 1.29 threshold which is the immediate support after the recent break lower.
Brent crude seems to be losing its bullish impetus after an aggressive rally. Yesterday, the price broke above the $85 threshold for the first time in nearly four years and registered fresh high of $85.42. The elevated levels have attracted sellers, and the profit-taking took Brent back below the $85 handle during the recent trading. The current retreat looks like a limited technical correction so far, and should the asset stay above the $84 figure, buyers could reemerge in the short term as the fundamental picture remains healthy and positive. However, further rally may bring demand-side concerns to the market as the global demand could suffer from too high prices.
Gold prices turned higher today amid the risk-off sentiment fuelling safe haven demand. However, the steady rise in the dollar caps the upside potential in the yellow metal as the price struggles to get back above the key $1,200 barrier. The bullion jumped to three-day marginally below $1,195 earlier in the day but has retreated since then and now tries to resume the local ascent. Despite the selling pressure on the precious metal has eased, chances for a more robust rebound are still shallow as the greenback remains on the offensive and could extend its gains after Powell’s statement.
Nathan Lambert, Head of Global FX Analytical Department