Most Asian markets enjoyed decent gains amid strong corporate results and renewed hopes for a resolution of the China-US trade war, European stocks turned mostly negative on Wednesday despite investors are bracing for a dovish outcome from the European Central Bank’s upcoming monetary policy meeting. The expected policy stimulus by major central banks however softened the negative impact from the IMF’s downgrade to its global growth forecasts to 3.2% in 2019, down by 0.1% from the assessment revealed in April.
Dismal economic data added to the bearish sentiment in Europe as German manufacturing PMI declined to its lowest level in seven years. French business growth also slowed. Investors are also getting more nervous as the new Conservative Party leader Boris Johnson has insisted the UK must leave the EU by the October 31 deadline “come what may”.
Against this backdrop, the UK’s FTSE 100 sheds 0.98 per cent to 7482, Italy’s FTSE MIB gains 0.40 per cent to 22,041, France’s CAC 40 declines by 0.29 per cent to 5,601, while German DAX 30 adds 0.39 per cent to 12,539. US stock index futures are slightly negative as investors are cautious ahead of the release of key earnings from companies including Boeing, Facebook, Ford, PayPal and Tesla. For now, from a quarter of S&P 500 companies that reported their quarterly earnings so far, nearly 80% registered a better-than-expected profit.
Meanwhile, the euro slumped to two-month lows around 1.1125, as the downside pressure has intensified after a break below 1.12. Apart from dovish expectations ahead of the upcoming ECB meeting, the negative sentiment around the common currency rose following the regional PMI figures. the Eurozone PMI declined from 52.2 to 51.5 in July amid the deepening manufacturing contraction, which pointed to weak growth in the third quarter. By the way, manufacturing employment in the region fell for the third month in a row.
Against this backdrop, the odds of a rate cut by the ECB tomorrow increased. However, the central bank will likely postpone its steps towards additional easing until September as the monetary authorities may want to see what the Fed will do later this month. Anyway, the common currency will likely remain vulnerable in the short-term as traders will be cautious ahead of the ECB meeting. By the way, should the central bank’s tone come less dovish that expected, the euro could stage an impressive recovery above the 1.12 handle.
In commodities, oil prices are trading with a shallow bearish bias on Wednesday, unable to extend yesterday’s rebound. Brent has settled just below the $64 level and remains vulnerable to losses as traders continue to express concerns over global demand, especially after the IMF downgraded its global growth forecasts. Meanwhile, the API report that showed the crude oil inventories in the US contracted nearly 11 million barrels last week, failed to lift prices and gave only a short-lived relief to the market. In the short-term, Brent could slip towards the $63 or lower if the official report from the EIA comes less bullish than the estimate by API.
Nathan Lambert, Head of Global FX Analytical Department