European stock markets turned lower on Friday amid renewed fears of a possible collapse of the Italian government and further escalation in the US-China trade war. In Italy, deputy prime minister and leader of Italy’s ruling Lega party, Matteo Salvini, declared the arrangement unworkable and called for fresh general elections. As a result, the local bank’s shares dropped and made the regional lenders tumble amid political uncertainty. Meanwhile, in the wake of China's suspension of U.S. agricultural purchases, the Trump administration reported it is holding off on approving licenses for U.S. companies to resume doing business with Huawei. Investors took it as a sign of rising trade tensions, which capped demand for risky assets.
On the data front, Chinese data revealed that food inflation soared in July, while Japan’s economy was shown to have grown more than expected in the second quarter. The British economy has shrunk for the first time since late 2012 after U.K. second quarter GDP contracted by 0.2%. In Germany, trade balance narrowed to €18.1 billion in June from €18.7bn in May, with exports were down by 8% and imports increased by 0.5% MoM, from -0.5% MoM in the previous month.
Against this backdrop, UK’s FTSE 100 sheds 0.13 per cent to 7276, Italy’s FTSE MIB plunges 2.18 per cent to 20,387, France’s CAC 40 loses 0.93 per cent to 5,337, while German DAX 30 declines by 1.10 per cent to 11,715. US stock index futures are drifting lower as well, erasing gains from the previous session.
In the past days, EURUSD is alternating gains with losses but looks robust in the weekly charts after a strong rally witnessed on Monday. Following a jump to 1.1250 earlier in the week, the common currency failed to confirm a break above the 100-DMA and has settled around 1.12 since then. On Friday, the pair turned into a recovery mode, partly due to a muted dollar demand and reduced spread in US-German yields. On the data front, German trade surplus narrowed to €16.8 billion in June, while the current account surplus came in at a non-seasonally-adjusted €20.6 billion during the same period.
Meanwhile, the probability of snap elections in Italy is increasing as frictions within the coalition government have intensified recently. In the short-term, the euro could remain marginally elevated as Trump once again criticized strong dollar and thus capped USD demand. In a wider picture, the upside for EURUSD is limited, especially amid reemerging political risks in Italy.
In the oil market, Brent struggles to resume a sustainable recovery, challenging the $58 level after an earlier dip to lows around $57. In its monthly oil market report, the International Energy Agency lowered its global oil demand growth forecasts for this year and next, citing fears of an economic downturn as the US-China trade war casts a shadow over markets. The agency also noted that OECD oil demand has fallen for three quarters in a row for the first time since 2014, while global oil demand from January to May rose 520,000 bpd, the lowest increase for that period since 2008. Meanwhile, the trade frictions remain in market focus, with lingering tensions continue to cap the upside potential in Brent.
Nathan Lambert, Head of Global FX Analytical Department