European stocks extend the rally on Wednesday, along with other riskier assets, buoyed by optimism over the US-China trade talks. Trump indicated a possibility of postponing the March 1 deadline for rising tariffs from 10% to 25% if the two countries ‘were close to a deal’. The US officials are due to arrive Beijing on Thursday, while the Chinese leader Xi Jinping may have a meeting with them on Friday. Investors are also cheering the reports that another US government shutdown is unlikely. According to the latest reports, Trump will use executive order to allocate more funds to wall, avoiding shutdown. In other news, euro zone industrial production contracted 0.9% versus -0.4% expected in December, which is the fastest pace of decline since the global financial crisis. But as investors are focused on trade talks, they have shrugged off another disappointing report in the region.
As such, Britain’s FTSE 100 adds 0.75 per cent to 7,186, France’s CAC 40 is up 0.43% to 5,078, while German DAX 30 rises by 0.33 per cent to 11,162. US stock index futures point to fresh highs on Wall Street due to hopes of a progress towards a deal between the US and China. According to the reports by White House, final trade deal depends on Trump-Xi meeting.
US January CPI came at 2.2% versus 2.1% y/y expected and +1.9% in the previous month, when the rate was the lowest since July 2017. However, the rate was the weakest since September 2016. Consumer process excluding food and energy also came better than expected, at 2.2% versus 2.1% y/y. On a monthly basis, the core index was in line with expectations at +0.2%. As for wages, average weekly earnings jumped from 1.4% to 1.9%, while average hourly earnings increased by 1.7% versus 1.3% in December. Despite the overall data was quite positive, there is nothing in the report that could drive the Fed to put rate hikes back on the table, and wait-and-see mode is still appropriate.
Anyway, the greenback has accelerated its ascent after the report. EURUSD plunged back below the 100-hour moving average and returned under the 1.13 level. Earlier in the day, the common currency had to give up its tentative recovery attempts due to a combination of disappointing euro zone industrial production data and the resurgent dollar strength. At the same time, the selling pressure looks limited at the moment and it may be a sign of dollar bulls’ weariness after the recent rally. Improved risk sentiment caps the upside pressure for the USD partially though the general sentiment towards the US currency looks fairly robust. As such, the bearish risks for the pair persist in the short term.
Oil market continues to show a bullish slope after Brent regained the $63 handle and settled above. Improved risk sentiment provides support to the market. Yesterday’s reports that Saudi Arabia was going to continue its aggressive plan to curb its crude output also lift prices. The energy minister said that the country will reduce its oil production to around 9.8mbpd in March. US government shutdown fears continue to abate which adds to the upside pressure, along with hopes of resolving the trade spat between the world’s two largest countries. It looks like that bulls are now eyeing a break above the 2019 high of $63.62 registered earlier this month. The confirmation of a bullish scenario will depend on the developments around the Washington this week. Should the risk sentiment remain elevated, Brent could challenge the $64 barrier in the short term. But once (and if) the downside risks reemerge, the prices could suffer a steep correction amid profit-taking.
Nathan Lambert, Head of Global FX Analytical Department