European markets opened mixed on Wednesday but turned lower during the session, ending a six-day rally. The sources of pressure are weak results from banks, including BNP Paribas, heightened Brexit uncertainty, persistent global growth worries and investor skepticism that the US and China will be able to find common ground for a breakthrough trade deal before the March deadline. As for the trade, US Treasury secretary Steven Mnuchin confirmed that the country’s representatives will visit Beijing next week for trade talks with China. He expressed confidence that the US Congress will pass new trade pact with Canada, Mexico and highlighted that there is still a lot of work to do in US-China trade talks despite the two countries made progress last week. Despite some developments towards the deal, markets remain skeptical that there will be actual progress next week.
Meanwhile, in Europe, European Council president Donald Tusk stated that EU27 will make no new offer on Brexit. Hу pointed that withdrawal agreement is not open for renegotiation, Irish border is top priority, and also expressed hopes to hear realistic suggestion from May on how to end the impasse. Against this unstable backdrop, Britain’s FTSE 100 sheds 0.16 per cent to 7,166, France’s CAC 40 is down 0.13% to 5,076, while German DAX 30 declines by 0.39 per cent to 11,324. US stock index futures are pointing lower after Trump vowed to build a wall that’s the source of a deep partisan divide. The Fed’s Powell is scheduled to speak in Washington later today.
The dollar turned mixed on Wednesday after a nearly widespread rally since the start of the week. Investors have digested the Fed’s patient shift but some still hope that not-so-terrible economic data will allow the central bank to resume hiking rates later this year. As for the data, the US November trade balance came at -$49.2B versus -$54.0B expected. The prior result was revised from -$55,5B to -$55.7B, which is the worst since 2008. So a bounce in November should be good for investors ahead of another round of trade talks.
EURUSD extends its decline for a third day in a row on the back of a stronger dollar coupled with weak economic data in Europe. The pair derailed the 1.14 support and slipped to nearly two-week lows in the 1.1380 region. Germany construction PMI came at 50.7 in January versus 53.3 expected, while December factory orders declined 1.6% versus the expected rise by 0.3%. So another portion of statistics confirms the slowing growth in the largest euro zone economy. Moreover, Italy may come back in the spotlight at the European Commission may slash Italy’s 2019 growth forecast dramatically, to just 0.2% from the previous estimate of 1.2%. The commission will release its latest economic forecasts tomorrow. While the cut itself is not surprising for anyone, given that the country is now in a technical recession, is may later raise questions about the approves budget deficit proposal. So there is a scope for further euro weakness from the current levels. A daily close below 1.14 will worsen the neat term technical outlook for the EURUSD pair.
Brent crude remains pressured on Wednesday, with the prices dipped to five-day lows marginally above the $61 level, where the barrel met some buying interest and trimmed intraday losses. Some volatile dynamics in the markets confirms that contradictory factors continue to set the tone for the market. Brent dipped as Venezuela sanction concerns started to fade this week, while the US shale inventories continue to increase. But in the longer term, the US sanctions on Venezuela may yet prop up prices. Meanwhile, worries about weaker global economic growth and the US-China trade dispute continue to weigh on the market. Should the new round of negotiations bring some progress towards a deal, Brent may appreciate if the dollar bulls loosen their grip.
Nathan Lambert, Head of Global FX Analytical Department