European markets dropped significantly on Monday following a 3% slump in Asia amid a widespread risk aversion after U.S. President Donald Trump unexpectedly ratcheted up trade tensions with Beijing by vowing to hike tariffs on Chinese goods. The US leader decided to raise current tariffs from 10% on $200 billion of Chinese goods to 25% and also threatened to impose extra 25% levies on an additional $325 billion of Chinese goods «shortly». Now, the Chinese officials are considering whether to back out of trade talks with the U.S. that were scheduled for this week.
Against this backdrop, France’s CAC 40 is down 1.82 percent to 5,448, while German DAX 30 declined by 1.74 per cent to 12,196. Markets in Britain remained shut for a bank holiday. US stock index futures also point to a slump amid the trade war escalation.
The greenback is mixed against major rivals on Monday with EURUSD is still clinging to the 1.12 handle after a brief dip to 1.1167 early in Asia. The pair is in part supported by strong European data. In particular, the Sentix index, which measures investors’ confidence in the region, improved to 5.3 for the month of May while retail sales came in flat on a monthly basis in March versus a forecasted 0.1% drop and expanded 1.9% from a year earlier, also bettering expectations. Despite upbeat reports, the euro’s upside potential remains limited as traders are now focused on the US-China trade developments.
Meanwhile, USDJPY dropped to late-March lows around 110.30 during the early trading as risk-off tone sent the safe-haven Japanese yen higher across the board. After the knee-jerk reaction, however, the pair trimmed losses but failed to close the bearish gap and has settled around the 111.00 level which acts as the immediate resistance now. In the short-term, the dollar remains vulnerable to further losses as fresh signs of trade escalation may emerge. On the downside, a break below 110.30 will open the way towards 110.00.
In commodities, Brent crude turned positive on the day after the initial slump in Asia along with other riskier assets. After bottoming out at $68.80, prices recovered above the $70 handle but struggle to regain the $71 level. As the market focus shifted to the US-China trade relations after Trump’s tweet, the potential for a more robust rebound in the oil markets is rather limited at the moment as investors are starting to price out striking a trade deal between the two world’s largest economies in the foreseeable future. A daily close above the $70 handle will come as neutral for Brent which needs at least to climb back above the $71 local resistance.
Gold prices are trending lower after a spike in Asia on widespread risk aversion. The precious metal jumped above $1,285 but retreated below $1,280 again as investors got a bit calmer following the initial negative reaction to Trump’s statement on tighter tariffs for China. As a result, the bullion has filled the bullish gap and turned lower on the day. However, the upside risks for the safe-have metal may yet reemerge as trade tensions are escalating.
Nathan Lambert, Head of Global FX Analytical Department