European stocks are mostly lower on Thursday as the risk-on tone started to wane after a sharp rally witnessed on Wall Street overnight. The fact that investor sentiment remains unstable reflects the persistent uncertainty surrounding the economic recovery and geopolitical issues including developments surrounding Brexit.
According to the latest news, the UK government said the internal market bill will be debated on September 14. Earlier in the day, the European Commission's legal advice said the UK bill was a "clear breach" of the Brexit withdrawal agreement. The EU reportedly could trigger a legal case against the UK if talks today do not provide reassurance. So, in the short term, today’s meeting between the UK and the EU will set a further tone to the regional markets.
On the positive side, Germany’s DIW institute raised the 2020 GDP forecast to -6.0% vs -9.4% previously in the June forecast. The 2021 German GDP forecast is now at +4.1% versus +3.0% in June. On the data front, France’s July industrial production came in at+3.8% versus +5.0% m/m expected. Meanwhile, the French government scientific advisor said they must do everything to avoid lockdowns.
Against this backdrop, the UK FTSE 100 index edges lower by 0.73% to 5,969, Italy’s FTSE MIB gains 0.33 percent to 19,835, France’s CAC 40 declines by just 0.06 percent to 5,039, while German DAX 30 adds 0.34 percent to 13,282. U.S. stock index futures are wavering Thursday as a rebound in technology stocks is losing steam.
In currencies, the dollar came under some selling pressure after the recent rally as risk sentiment has improved somewhat. However, as stocks struggle to extend the recovery, it looks like risk aversion could reemerge soon and drive the safe-haven greenback higher again. So far, EURUSD is holding above 1.18, refraining from challenging the 1.1850 intermediate resistance ahead of the ECB decision that will set a further tone for the common currency. Lagarde could point to the recent strength in the common currency and thus send the pair lower later in the day.
Meanwhile, oil prices are back on the defensive after a decent bounce seen yesterday amid a widespread rally in risky assets. Brent continues to closely follow risk trends, with the current weak dynamics in global stock markets suggesting the futures will likely struggle to extend the recovery in the short term. Furthermore, should the pressure intensify any time soon, Brent may get back below the $40 handle. Later today, the EIA weekly inventory report could affect market sentiment while in the longer term, the outlook for demand recovery remains in market focus.
Nathan Lambert, Head of Global FX Analytical Department