European stock markets wobbled Wednesday in response to escalation of US-Russia tensions over Syria. "Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and 'smart!'" Trump wrote on Twitter today. This ominous threat was enough to fuel a sell-off in risky assets, including global shares. Now, as the US-China trade tensions have eased for the time being, global investors face another matter of concern preventing stocks from further recovery. The European benchmarks faced additional pressure amid a bearish dynamics in health care stocks. However, the downside pressure is so far limited. As such, Britain’s FTSE 100 shed 0.15 per cent to 7,256, France’s CAC 40 is down 0.68 per cent to 5,271 and German’s DAX 30 loses 0.92 per cent to 12,283 Wall Street stocks set to open significantly lower.
The prevailing risk aversion fuelled some demand for safe haven currencies such as the Japanese yen and Swiss franc. However, the impetus is rather muted as currency markets continue to show relative calmness against the hostile geopolitical environment. In a similar fashion, the dollar remained almost unfazed by CPI report, despite the monthly reading posted its first drop in ten months in March. The muted reaction to the data was partially due to the fact that consumer prices were weighted down by a decline in the cost of gasoline, while the underlying inflation continued to rise. The core CPI rose 2.1 per cent YoY, the largest increase since February 2017. Moreover, real average hourly earnings climbed 0.4% against 0.3% in the previous month. So, the overall inflation picture in the US hasn’t changed dramatically and still complies with further gradual Fed tightening. By the way, the greenback will have another test today as the FOMC is set to release the minutes of its March meeting, when it voted to raise interest rates. It will be interesting to see, if the central bank is worried about the possible impact of Trump’s aggressive policies abroad.
EURUSD refreshed April highs just below 1.24. Euro bulls so refrain from attack of the psychological level, despite some “hawkish” ECB comments. In particular, Draghi expressed confidence that inflation will rise to the central bank’s goal. In the same spirit, ECB’s Hansson said that recent improvements in eurozone will accelerate inflation. It is possible that traders just hold back from more active decisions, awaiting cues from the release of minutes from the latest Fed and ECB meeting due today and tomorrow, respectively. However, the single currency still has a chance of probing the 1.24 barrier as the greenback remains vulnerable to further losses amid Trump’s aggressive external policy.
GBPUSD tried to break above the 1.42 threshold for the first time since March 27. The pair touched a high of 1.4222 but failed to preserve the momentum and retreated below the psychologically important level. However, considering the fresh portion of dismal UK economic numbers, the pound looks pretty resilient. UK manufacturing production contracted by 0.2%, while industrial production showed a lower than expected growth of 0.1% in February. However, the disappointing numbers were partly offset by a larger than expected shrinkage in the trade deficit. Further pound’s direction will depend not only on the overall sentiment around the buck, but also on the upcoming BoE governor Mark Carney statement, due on Thursday. The bank head may indicate the regulator’s readiness for further rate hikes, which will fuel pound’s rally above 1.42. In this scenario, the pair may even challenge the key resistance at 1.4250 which will open the way to early-February highs.
The oil market enjoys the rising geopolitical tensions. The situation around Syria lifted Brent to its highest levels in more than three years. The price jumped to highs just below the $72 and retreated partially afterwards, oscillating around $71.50. The bulls were strongly inspired by the threat of US military actions in Syria, and Russia’s involvement only adds to traders’ hopes for supply disruptions. Considering the heating atmosphere on this front, crude prices have a potential of going even higher, despite Brent looks overbought already.
Spot gold is also on the rise, with daily advance is so far the largest since March 23. The price regained several intermediate resistance levels and even dared to touch fresh April highs around $1,355. The yellow metal receives a double support, from weak dollar and risk aversion which reemerged as Syria came to the forefront of geopolitical tensions. Technically, gold approached a strong resistance of $1,357 which could be broken, should US and Russia continue to exchange threats.
Nathan Lambert, Head of Global FX Analytical Departament