After a bullish start, European stocks turned lower on Monday as investors continue to prefer safe assets amid the lingering US-China trade tensions. The People’s Bank of China set the official midpoint reference for its yuan currency above the psychological barrier of 7 per dollar for the third consecutive session. Trade talks set to resume in September, but Trump said on Friday that the U.S. is not ready to strike a trade deal with China just yet, which spooked investors and fueled concerns over the global economy. Local investors are also following political developments in Italy after Deputy Prime Minister Matteo Salvini’s Lega party filed a no-confidence motion to bring down the government late last week.
Against this backdrop, UK’s FTSE 100 sheds 0.42 per cent to 7223, Italy’s FTSE MIB loses 0.07 per cent to 20,308, France’s CAC 40 loses 0.56 per cent to 5,298, while German DAX 30 declines by 0.35 per cent to 11,652. US stock index futures also turned lower amid worries that the US-China trade conflict could tip the global economy into recession.
Meanwhile, EURUSD resumed the decline after a short-lived bounce on Friday. The pair dipped to one-week lows around 1.1160 and then recovered to 1.12. The area of lows capped the upside attempts earlier and could serve as a local support should dollar demand remain subdued in the short term. Further on, the common currency may remain under pressure should fresh economic data disappoint. On Tuesday, ZEW economic sentiment index is due, while Eurozone industrial production will be released on Wednesday. It is expected that production will show a 1.4% decline after a rise by 0.9% in June. Also, traders will continue to monitor trade developments, with further escalation could put the greenback under pressure as expectations of further rate cuts by the Fed will rise as well.
USDJPY extends the decline, threatening the 105.00 figure. The pair is losing ground for a third week in a row as the safe-haven yen demand prevails. Considering the declining probability of striking a trade deal before the 2020 elections in the US, risk eversion could continue to drive the pair lower despite the oversold conditions. Should the greenback lose the 105.00 handle, the next bearish target will come around 104.70, where early-2019 lows lie. On the upside, the initial resistance comes around 105.60.
In the oil market, Brent struggles to gain upside traction after a limited recovery in the second half of last week. The futures were rejected from daily highs around $58.50 and are now trying to hold above the $58 handle. The market remains depressed as concerns over global demand persist amid worries about an economic slowdown and the U.S.-China trade war, especially after Trump called a September round of trade talks into question. Over the weekend, Goldman Sachs said on it no longer expects a trade deal between the world's two largest economies before the 2020 U.S. presidential election. Moreover, the International Energy Agency said on Friday that mounting signs of an economic slowdown had caused global oil demand to grow at its slowest pace since the financial crisis of 2008. As such, Brent will hardly be able to stage a significant recovery any time soon and will likely remain under the selling pressure.
Nathan Lambert, Head of Global FX Analytical Department