European equity markets dipped to two-month lows on Monday as investors continue to rush to traditional safe-haven assets amid rising trade tensions between the US and China. The pan-European STOXX 600 index, which fell 1% after a plunge by 2.5% on Friday, sees its worst day so far this year.
Last Friday, Trump wrote in Twitter that he was going to impose 10% tariffs on another $300bn worth of Chinese imports. New threat came after another round of trade talks concluded earlier in the week on a seemingly positive note, with both countries assessed the negotiations as “constructive”. On Monday, China’s central bank let the national currency fall through the 7 to the dollar level for the first time since 2008, which fueled worries about further escalation in tensions.
Against this backdrop, the UK’s FTSE 100 sheds 2.20 per cent to 7243, Italy’s FTSE MIB declined by 1.30 per cent to 20,773, France’s CAC 40 plunges by 1.89 per cent to 5,257, while German DAX 30 sheds 1.43 per cent to 11,702. US stock index futures are bleeding as well, with Dow futures tumble over 300 points after China devalued its currency.
The dollar is on the defensive against major rivals as escalating trade tensions point to a rising possibility of delivering a more aggressive stimulus from the Federal Reserve after the US central bank last week cut its interest rate by 0.25% for the first time in over ten years. Against this backdrop, EURUSD rallied to ten-day highs marginally below the 1.12 handle, rising for a third day in a row.
On the data front, IHS Markit's Eurozone Composite Final Purchasing Managers' Index dropped to 51.5 in July from June's 52.2, moving closer to the 50-mark separating growth from contraction. However, the euro was unfazed by the report as a weakening dollar is now the key driver for the pair. Besides, ECB’s Novotny said that he doesn’t think there is a need to restart QE. Should the pair regain the 1.12 mark in the near term, the technical picture will improve further.
In commodities, Brent crude turned lower after some bullish attempts earlier in the day. The prices failed to challenge the $61.55 area and had to lose over 100 points from daily highs amid a broad-based risk aversion after China devalued its currency. Trade concerns continue to weigh demand outlook, which may drive the prices below $60 should the tensions continue to escalate. The additional downside pressure on the oil market comes from signs of rising oil exports from the US. According to the official data revealed on Friday, the shipments from the country increased by 260,000 barrels per day in June and hit a monthly record of 3.16 million barrels. On the positive side, dollar weakness coupled with persistent geopolitical tensions in the Middle East help to curb the bearish pressure so far.
Nathan Lambert, Head of Global FX Analytical Department