Following a global sell-off, European stocks turned higher on Wednesday, recovering from two-year lows. However, in fact, there are no reasons for investor optimism. As expected, the European Commission has rejected Italy’s revised budget and said that disciplinary procedures should be adopted against the country for excessive debt. Meanwhile, Italy’s Conte insists that the government is convinced that the budget draft is valid. In other news, OECD has lowered 2019 global growth forecast to 3.5% from 3.7%. The only thing that could support the risk-on sentiment in the short-term, is the MNI report that the Fed could possibly pause the rate hike cycle as early as next spring. However, until we get official confirmation, it’s better to take the story with a pinch of salt. So far, Italy’s FTSE MIB adds 0.50 per cent to 18,563, Britain’s FTSE 100 gains 0.69 per cent to 6,995, France’s CAC 40 rises by 0.30 per cent to 4,939, while German DAX 30 adds 1.54 per cent to 11,126. US stock index futures are also higher after the recent sell-off.
The greenback got under a bearish pressure on the reports of a potentially softer stance by the Fed next year. The effect from the story could turn out quite significant, considering the latest cautious signals from the central bank. However, it’s still better not to jump to conclusions as the Federal Reserve will hardly send such an abrupt message to markets without any preparations. So far, EURUSD jumped 1.14 but struggles to accelerate higher as Italy’s woes are in focus. As mentioned earlier, the European Commission has rejected Italy’s budget and now the country could face some punishments and fines. Further market behavior will depend on conditions the EU will set for Rome. However, there are some positive reports from this front. Thus, Conte said that they will respond to the European Commission with reforms. At the same time, he expressed concerns about the bond yields spread. However, the upside potential for the euro from here remains limited, despite a bearish signal for the greenback. The euro will remain under pressure as long as the pair stays below the 1.15 threshold.
The pound was going lower until the speculations on the Fed tightening cycle emerged. After the MNI report, GBPUSD jumped from daily lows around 1.2771 and quickly regained the 1.29 level. As for Brexit news, May is under a heave Tory pressure ahead of meeting with Juncker. Much will depend on the outcome of the dialog, expecially in the context of the special EU Brexit summit on Sunday. These events imply further volatile trading in sterling, with bearish risks are still there. Any breakthrough however will fuel a rally in cable as the market cautiously prices in a possible no-deal Brexit. Technically, the pound needs to confirm a break above 1.29 in the short term in order to pave the way for further ascent. However, the chances that a scenario will come are low for the time being.
Brent crude is recovering ground slowly after yesterday’s plunge to February low of $62. The barrel is testing the $64 threshold now, but despite the immediate downside pressure has receded, the corrective rebound looks unsustainable now and prices could resume the decline at any point as the market is highly sensitive to bad news at this stage. Traders continue to doubt that OPEC+ producers will arrange output cuts in December, which prevents Brent from a steadier rise. In the short term, market participants will focus on the EIA data, especially after the API report that showed the crude oil inventories in the US unexpectedly declined by 1.5 m barrels for the first time since mid-September. A potentially bearish report could send the priced back under the $63 figure.
Gold prices lack positive momentum despite the dollar bulls are retreating. The precious metal declined yesterday and tries to recoup losses on Wednesday. The ascent however is limited by the $1.225 area. But in a wider picture, the $1.30 barrier is getting closer and could be reached should the latest story on the Fed policy gains traction in the markets. The immediate challenge for the yellow metal is to stay above $1.220.
Nathan Lambert, Head of Global FX Analytical Department