European markets turned negative on Wednesday, after a decent rally in the previous session. Risk sentiment turned sour amid fresh negative news from the trade front after Trump threatened to hike tariffs on China next month should the two countries fail to partially resolve the remaining issues. As a reminder, earlier, China said it was pessimistic about the prospect of a phase one deal, citing Trump’s unwillingness to roll back tariffs. Besides, the US Senate passed legislation supporting Hong Kong protesters, which caused a negative reaction from China’s foreign ministry. In Europe, the additional pressure on stocks came from the ECB Financial Stability Report, in which the central bank warned about substantial challenges to the euro area economy from a slowdown in bank profitability and excessive financial risk-taking.
Against this backdrop, UK’s FTSE 100 loses 1.00 per cent to 7250, Italy’s FTSE MIB sheds 0.16 per cent to 23,291, France’s CAC 40 declines by 0.39 per cent to 5,886, and German DAX 30 sheds 0.74 per cent to 13,122. Meanwhile, US stocks index futures are trading lower amid rising doubts about a possible trade deal between the world’s two largest economies. Also, investors are nervous ahead of the minutes from the Federal Reserve’s October meeting due later today.
In currencies, the dollar regained strength against the European currencies and turned even lower against the safe-haven Japanese yen. EURUSD dipped to the 1.1055 support area after a rejection from the levels just below the 100-DMA. Despite the retreat, the downside pressure is limited for now. Moreover, the pair could even reverse its course should the Federal Reserve officials surprise the USD bulls to the downside. The central bank will likely reiterate its data-dependence which would be neutral for the greenback, but if the officials point to downside risks for the economy from the trade spat and other issues, traders will take in as a hint at the possibility of additional rate cuts after a pause in policy easing. In this scenario, EURUSD could win back its losses and get to the 1.1080 area.
In commodities, Brent crude is making recovery attempts from early-November lows around $60,30. The futures suffered decent losses on Tuesday, as traders expressed concerns over the lack of progress towards a phase one deal between the US and China. Also, Russia signaled its unwillingness to discuss deeper cuts in oil output at the upcoming OPEC+ meeting in December. Besides, the API report showed that US crude oil stockpiles increased by another 6 million barrels last week, which added to the selling pressure in the market. In the short term, Brent will likely struggle to firmly regain the upside momentum should risk sentiment stay negative.
Nathan Lambert, Head of Global FX Analytical Department