European stocks fall on Tuesday as investor optimism over the US-China trade relations was replaced by uncertainty. There are rising doubts over whether the two countries will manage to resolve the existing differences in a 90-day period. By the way, the US secretary of commerce Wilbur Ross noted that everybody will be happy if China lives up to its commitments. Beijing, meanwhile, keeps silence and refuses to comment the statements from the US following Trump-Xi meeting in Buenos Aires. And this silence somehow unnerves global investors.
In Europe, autos and technology sector lead the losses today, with both down nearly 2% and 1% accordingly. German DAX 30 declines by 0.76% to 11,378 following Ross’ comments on autos. In particular, he pointed to a large trade gap on auto and auto parts, the autos trade deficit with Germany which is about $30 billion, as well mentioned a goal to increase German auto production in the US. As for other regional indexes, Italy’s FTSE MIB also sheds 0.76 per cent to 19,474, Britain’s FTSE 100 declines by 0.72 per cent to 7,011, while France’s CAC 40 loses 0.75 per cent as well, to 5,016. US stock index futures are falling as the G-20 Summit euphoria fades away.
Despite the risk sentiment has worsened, the greenback lacks demand as the Treasury yields decline. The 10-year yields are trading below the 3.00% mark, close to three-month lows. Moreover, the spread between 5- and 3-year notes have inverted for the first time since 2007, which is a clear sign of the impending recession in the United States. Further negative developments in the Treasury market could thus fuel crisis fears and make the Fed give up on further tightening. In this contest, there is a threat for the USD bullish trend in the longer term, while for now, the buck feels the additional pressure from rising European currencies.
Euro and cable are rallying on Tuesday, with both pairs are testing critical short-term technical levels. Pound jumped above 1.28 as EU court aide said the UK may have an option to revoke Article 50 unilaterally. Despite the UK PM spokesman mentioned later that the government position is that the Article will not be revoked, the cable remained buoyant, trying to stay above the 1.28 level. But we should remember that uncertainty ahead of the meaningful vote due on December 11 continues to serve as factor capping the pound’s upside potential. Therefore, the current rally should be taken as a selling opportunity as Brexit-related downside risks are still there.
EURUSD jumped above the 1.14 threshold and touched a high of 1.1418 for the first time since November 23. The pair has retreated partially since then and is yet to confirm a bullish breakthrough in the short term. Italy's economy minister Giovanni Tria stated that the government is studying possible solutions in dialogue with European Commission and examining various options regarding revision of budget. He also added that the country needs to avoid EU procedures on budget, which suggests that the government is committed to more concessions to Brussels in accordance with its demands. But unless the budget issues are resolved, the euro will remain vulnerable to losses even as the greenback is losing its attractiveness.
In the oil markets, dollar weakness coupled with some positive comments on the upcoming OPEC meeting keep Brent afloat as the prices extend the recovery after a 4%-rally at the start of the trading week. Recent reports saying that OPEC producers are looking towards cutting production by 1.3 million bpd inspired the traders and sent Brent to October 22 highs around $63.55. However, Saudi Arabia
poured some cold water on market expectations as the oil minister emphasized that it was premature to say if OPEC+ will cut production. The probability of a cut is rather high, despite Russia is now considered as the key impediment ahead of the crucial summit. In the short term, Brent will hardly be able to settle above the $63 handle due to the lingering uncertainty.
Nathan Lambert, Head of Global FX Analytical Department