European stocks reversed the previous session’s rally on the back of Trump’s delay to further tariffs on Chinese imports. Regional markets turned negative again, as investors are disappointing German and euro zone GDP data. Germany’s GDP shrank by 0.1% in the second quarter, fueling fears of a recession for Europe’s largest economy. The euro zone GDP grew by just 0.2% quarter-on-quarter, a significant slowdown from the 0.4% growth reported in the first quarter.
In other news, Italian senate postponed a further debate on its ongoing government crisis until next week, while the UK and the United States are discussing a partial trade accord which could take effect on November 1. Risk aversion has intensified as the U.S. 2-year Treasury note yield trades above the 10-year note yield for the first time since 2007, reinforcing recession worries. The yield on the 10-year Treasury note was down 5.7 basis points at 1.619%, while the 2-year yield was down 4.1 basis points at 1.628%.
Against this backdrop, UK’s FTSE 100 sheds 1.20 per cent to 7164, Italy’s FTSE MIB loses 2.10 per cent to 20,108, France’s CAC 40 loses 1.40 per cent to 5,288, while German DAX 30 declines by 1.54 per cent to 11,569. US stock index futures are also edging lower amid yield curves inversion and weak economic data from major economies, fueling recession fears.
Meanwhile, despite dismal economic updates from Germany, EURUSD rose to daily highs due to declining yields in the US Treasury market. However, the pair still struggles to get back above the 1.12 handle. In part, the common currency is capped by the reemerged source of uncertainty in the form of Italian politics. On the other hand, the dollar lacks demand due to bond market dynamics, which is limiting the potential pressure on the pair. In the short-term, the 1.12 level will remain in traders’ focus, with a break above the 100-DMA around 1.1225 is still needed for the technical picture to improve marginally.
Brent crude resumed the decline after yesterday’ rally as traders express renewed concerns over demand prospects amid disappointing economic reports from China and Germany. China a reported a surprise drop in industrial output growth to a more than 17-year low. A slump in exports sent Germany’s economy into reverse in the second quarter, while the euro zone’s GDP barely grew in the second quarter. Profit taking after an aggressive rally on Tuesday also weighs the sentiment in the oil market. Moreover, data from the American Petroleum Institute showed U.S. crude stocks unexpectedly rose by 3.7 million barrels last week compared with expectations for a decrease of 2.8 million barrels. As such, Brent failed to hold above the $60 handle and slipped to daily lows around $59.60 and could go even lower should risk aversion extends on Wall Street.
Nathan Lambert, Head of Global FX Analytical Department