Following the initial hesitation, European stocks turned positive on Tuesday, shifting to a recovery mode after a massive sell-off witnessed at the start of the trading week. As markets are focused on the developments in the trade relations between the Us and China, some recovery in the Chinese yuan has brought a relief to investors.
The PBOC denied Washington’s allegations of currency manipulation, and set its yuan fixing at 6.9683 per dollar, below the handle of 7 per dollar that it had breached yesterday. As a reminder, Chinese authorities allowed the national currency to slide below 7 per dollar for the first time since 2008, which followed by Trump’s accusations in manipulating the yuan.
Despite the sentiment has improved marginally, the trade tensions remain elevated. As such, last week the US leader unexpectedly announced 10% tariffs on another $300 billion worth of Chinese goods, starting September 1. In retaliation, Beijing suspended the purchase of U.S. agricultural products and devalued its currency. In such circumstances, the prospects of striking a deal between the world’s two largest economies are now looking more remote than ever.
So far, UK’s FTSE 100 adds 0.12 per cent to 7231, Italy’s FTSE MIB recovers by 0.53 per cent to 20,883, France’s CAC 40 rises by 0.98 per cent to 5,292, while German DAX 30 adds 0.60 per cent to 11,728. US stock index futures recover from steep early loses after China’s central bank set the yuan’s reference point higher than expected. Yesterday, the US stocks had the worst day since the start of the year, with Dow shed nearly 770 points.
As for currency markets, dollar is mixed against the majors. USDJPY recovers from an aggressive sell-off, with prices briefly jumped above 107.00 but retreated to the 106.40 area, after an earlier dip to fresh lows around 105.50. The pair’s behavior shows that traders remain nervous despite the panic has abated, which means the downside risks for USDJPY persist as risk aversion could reemerge at any moment.
Meanwhile, Brent crude registered fresh early-2019 lows at $59.24 and has settled around the $60 key level since then. Traders remain cautious amid a sharp escalation in the US-China trade war which could hurt the global economy and thus threatens energy demand. As long as heightened risks from the trade front remain, crude oil prices will be vulnerable to further losses, while bullish attempts will likely attract the selling interest. In the short-term, a daily close below the $60 handle will make the technical picture even worse. On the downside, a break below the $59.25 area will open the way to $59 and then to $58.30-$58.40.
Nathan Lambert, Head of Global FX Analytical Department