European stock markets extended gains on Thursday, as investor sentiment has improved on the back of easing tensions between the United States and Iran after Trump said that Tehran appears to be standing down following missile strikes on Iraq airbases housing U.S. troops. The US leader threatened to impose additional economic sanctions on Iran. So, as the president’s rhetoric came not as scaring as many feared, investor demand for riskier assets reemerged.
Meanwhile, European Commission President Ursula von der Leyen highlighted that the U.K. would find it basically impossible to negotiate all aspects of its future relationship with the EU by the end of 2020. She also added that the relationship between the two will not be the same as before. On the data front, German factory output saw the most impressive rise in a year and a half in November, with the output rising 1.1% on a monthly basis, beating expectations, which added to the improving sentiment in the regional markets.
Against this backdrop, UK’s FTSE 100 adds 0.53 per cent to 7,614, Italy’s FTSE MIB gains 0.86 per cent to 24,036, France’s CAC 40 rises by 0.43 per cent to 6,056, while German DAX 30 rallies by 1.28 per cent to 13,490. U.S. stock index futures point to a higher open after yesterday’s recovery to fresh all-time highs, with market focus remaining attuned to geopolitical developments.
EURUSD briefly dipped to fresh two-week lows below the 1.11 handle and remains close to this figure, trading modestly in the positive territory in the daily charts. The euro failed to capitalize on positive German data as currency traders remain somehow cautious after the recent sell-off in risky assets amid geopolitical tensions. Still, recovery attempts may signal a local bottom for the pair if market sentiment continues to improve further in the short term. Also, the upside momentum in the pair is capped amid expectations ahead of the key employment report out of the United States. As the ADP data showed yesterday, private sector employment rose by over 200,000 last month, so if the NFP numbers exceed expectations as well, the common currency may come under the renewed selling pressure amid broad-based dollar strength.
In commodities, Brent crude failed to regain the $66 figure earlier in the day and turned negative again, suffering losses for a fourth day in a row. On Wednesday, the futures lost over 5% in a correction amid the receding geopolitical risks coupled with bearish industry news. According to the EIA report, crude oil inventories rose by 1.2 million barrels last week while gasoline stockpiles jumped by over 9 million barrels, signaling a weaker demand. In the short term, Brent needs to hold above the $65 handle in order to avoid deeper losses. Once below this level, the futures will threaten the 200-DMA at $64.
Nathan Lambert, Head of Global FX Analytical Department