European markets extend losses on Tuesday amid a sudden escalation in the US-China trade war. Despite Trump’s threat to impose fresh tariffs on Chinese exports, Chinese vice Premier Liu He will reportedly still be traveling to Washington this week for further negotiations. But it doesn’t bring a relief to investors as they are doubting now that the two countries are getting closer to a trade deal.
Against this backdrop, the UK FTSE 100 loses over 1 per cent to 7,303, France’s CAC 40 is down 0.77 percent to 5,441, while German DAX 30 declined by 0.61 per cent to 12,212. US stock index futures also point to a lower open, with Dow futures tumble over 100 points as investors are nervously awaiting fresh trade talks.
The dollar was on the defensive in the early trading but managed to trim intraday losses against the European currencies on Tuesday. In a wider picture, the greenback remains under pressure amid growing speculations that the Fed will have to cut interest rates some time later. By the way, the possibility of borrowing costs reduction increased amid the renewed trade tensions as concerns over the US economy reemerged. Despite dollar weakness, EURUSD struggles to show a sustainable bullish momentum and break above the 1.220 intermediate resistance which stands on the way to the 1.1260 area. The reason is that the common currency doesn’t have any significant drivers to see a rally, while dollar catches some bids on dips, which caps the upside impulse as well.
USDJPY is back under pressure though keeps away from yesterday’s lows in the 110.30 area. The pair failed to get back above 111.00 and retreated to the 110.60 area. The prevailing risk aversion keeps up safe-haven yen demand which could turn sour later in the week if the US and China report a progress in their negotiations. The possibility of such a scenario has decreases, however, after Trump’s tweets on Sunday that sent global financial markets lower. Technically, USDJPY needs to settle above the 100-DMA around the current levels in order to have a chance for another bullish attempt in the 111.00 area.
Brent crude turned negative after failed attempts around $71.40 and seems to be threatening the $70 handle. The oil market shows heightened volatility this week since Trump reignited investor concerns over the trade war and as a result worries about oil demand from China. On the other hand, heightened tensions in the Middle East are supportive for oil prices as well as expectations of a significant decline in global oil supply amid sanctions against Iran and Venezuela. Later today, the API will announce its weekly inventories report but it could be ignored by the market as traders are focused on the developments on the US-China trade front.
Nathan Lambert, Head of Global FX Analytical Department