European stock markets started the session on a positive mood but failed to preserve the upside momentum and erased early gains as risk sentiment turned sour as the next round of the US-China trade talks looms. The United States expanded its trade blacklist to 28 Chinese companies, which spooked investors and curbed their positive expectations. A day earlier, China said it might not agree on a broad trade deal with Washington, which added to uncertainty in the global financial markets.
On the data front, German industrial production unexpectedly rose in August but did little to ease concerns over the state of Europe’s largest economy which contracted in the third quarter and is on the verge of a recession now. Industrial output rose by 0.3% on the month, versus the expected 0.1% drop. Also, July’s reading was revised up to a fall of 0.4% from a previously reported drop of 0.6%.
Against this backdrop, UK’s FTSE 100 sheds 0.22 per cent to 7181, Italy’s FTSE MIB loses 1.24 per cent to 21,382, France’s CAC 40 edges lower by 1.18 per cent to 5,456, and German DAX 30 sheds 1.09% to 11,965. Meanwhile, US stocks index futures turned lower along with European equities and are poised to suffer losses for a second session in a row as investors express doubts in the potential progress in the US-China trade relations due to the latest negative developments.
In currencies, the greenback is mostly lower, with USDJPY quickly reversed course and turned negative on the day as risk-off sentiment reemerged. The pair slipped back below the 107.00 handle but so far holds above the previous lows around 106.50. another source of weakness in the dollar is a fresh economic report out of the US. NFIB September small business optimism index came in at 101.80 versus 102.0 expected. Recently, risk aversion intensified after reports that Chinese delegation already planning to cut short its stay in Washington, while the Trump administration is looking to limit Chinese stocks within the government pension fund. As the sentiment deteriorates further, the safe-haven yen demand could intensify, with USDJPY could even challenge the 106.00 handle by the end of the week.
Oil prices also reversed the course after a series of negative trade-related headlines, dashing hopes of progress in the upcoming negotiations. As a result, concerns over global demand increased and pushed Brent lower, after failed attempts to get back above the $59 handle. As such, the prices slipped to the $57.50 area, with Iraq and Ecuador unrest did little to stem the selling pressure as market participants are focused on the issues surrounding trade woes and global economy. In the short term, Brent could remain under pressure but will likely hold above the lows around $56.
Nathan Lambert, Head of Global FX Analytical Department