European stocks are trading in a muted manner on Wednesday, with most indices are marginally lower amid a decline in the auto sector. Investor optimism in Asia over the announced fresh stimulus measures in China failed to spill over into the European session. The German auto maker Schaeffler reported a fall in full-year net profit and warned of an “extremely challenging” business environment in 2019. As a result, the company’s shares tumbled over 10% and dragged the regional markets lower. Daimler, BMW, and Volkswagen tumbled, dragged the DAX down. Against this backdrop, Britain’s FTSE 100 adds 0.17 per cent to 7,195, France’s CAC 40 is down 0.08% to 5,292, while German DAX 30 declines by 0.12 per cent to 11,606. US stock index futures are trading lower on Wednesday as investors continue to await further US-China trade developments.
The dollar index gains for a fifth day in a row after positive US economic data and amid a subdued risk demand. EURUSD continues to flirt with the 1.13 handle after a break below the 100-DMA early this week. The selling pressure on the common currency seems to be easing now but the pair remains on the defensive, while the short-term technical outlook looks rather weak at this stage. Tomorrow’s ECB meeting will set further direction to the euro. The most important signal to watch will be related to the extension of the TLTROs and interest rate forward guidance. It is likely that Draghi will signal at the upcoming meeting that the central bank is looking closely into offering another TLTRO in coming months. If so, the downside pressure on the euro could increase. The next support area comes at 1.1270, while the immediate resistance lies around 1.1340.
GBPUSD remains depressed above the 1.31 handle on Wednesday. The pair is pressed down by a generally stronger greenback, lack of risk demand, as well as the lingering uncertainty surrounding Brexit. The Brexit talks between Britain’s Attorney General Cox, Brexit Secretary Barclay and the European Union Brexit negotiator Michel Barnier concluded with no agreement reached yesterday, and the negotiations continue today. Recently, the EU said to not expect Brexit breakthrough before the weekend. This caps the pound recovery further despite some positive comments by the Bank of England’s Carney who said market path of BoE rates may not be high enough, while real wages are now growing. A strong UK service PMI report yesterday failed to impress the bulls either, as traders are still focused on Brexit developments.
After the initial decline, crude oil prices turned positive on the day but Brent still lacks the impetus to regain the $66 figure. The latest API report showed that the US crude oil stockpiles increased by 7.3 million barrels last week, which spook investors and dragged the prices lower. The ongoing shale boom remains one of the key concerns for commodity traders despite OPEC's commitment to the output cut deal. Despite the current recovery attempts, the sentiment in the market remains fragile as traders are awaiting fresh catalysts and further progress towards a trade deal between the US and China. As investors remain in a wait-and-see mode, Brent is unlikely to stage a strong rebound in the near term, while downside risks remain.
Nathan Lambert, Head of Global FX Analytical Department