European stocks are trading lower on Monday as investors react to an escalation of tensions in the Middle East following an attack on Saudi oil production. Meanwhile, fresh data revealed Chinese industrial output for August grew at its slowest pace for 17.5 years, and Chinese Premier Li Kequiang said it is “very difficult” for China’s economy to grow at a rate of 6% or more. The news from China added to the gloomy picture in the stock markets.
Against this backdrop, UK’s FTSE 100 loses 0.17 per cent to 7354, Italy’s FTSE MIB declines by 0.84 per cent to 21,995, France’s CAC 40 sheds 0.56 per cent to 5,623, while German DAX 30 declines by 0.50 per cent to 12,406. US stock index futures also dropped after a drone strike on a Saudi Arabian oil facility increased geopolitical risks in the Middle East.
Elsewhere, in a series of tweets, the US President Donald Trump called upon the Federal Reserve to make a "big interest rate drop". Nevertheless, the dollar broadly higher against the majors as risk aversion prevails. EURUSD found a local support around 1.1030 and has settled around the daily lows. The additional negative pressure on the common currency came from Italy, where former Prime Minister Matteo Renzi is planning to break away from the ruling Democratic Party in order to set up a new centrist movement. Such a step is obviously complicating the new coalition between the PD and the anti-establishment Five Star Movement.
USDJPY meanwhile is desperately trying to close a bearish gap but struggles to regain the 108.00 level as yen demand prevails amid a risk-off sentiment in the global financial markets. The pair dipped to daily lows marginally below 107.50 earlier and now needs to regain the 100-DMA just above 108.00 to see further easing in the selling pressure.
Meanwhile, developments in the oil market remain in focus today. Brent crude surged after drone attacks over the weekend hit major oil production facilities in Saudi Arabia. Moreover, according to the latest reports, Saudi officials consider delaying Aramco IPO, with the company’s officials are growing less optimistic about a rapid recovery of the crude oil output following the attack. Also, officials have asked international contractors to assess the damage to its facilities. Additionally, Iran’s Revolutionary Guards claimed to have seized a vessel in the Gulf, which adds to geopolitical concerns and lofts prices further. As such, after the recent retreat below $65, Brent resumed the rally and has got back to $67. At least in the short-term, prices will likely stay elevated, with traders will continue to monitor developments surrounding Saudi Arabia.
Nathan Lambert, Head of Global FX Analytical Department