European stocks are bleeding hard on Friday along with equity markets globally after the Chinese yuan dipped to 10-year lows in Asia. Disappointing earnings from Amazon and Alphabet in the US also contributed to the global sell-off amid growing worries over the global economy. European stocks are on track to register the worst month since 2015, with Italian drama also weighs the regional shares. Investor sentiment was also exacerbated amid signs of a gridlock in US-China trade relations after Washington to resume trade negotiations with China until Beijing offers concrete proposals to address US complaints on a number of economic issues. As such, Italy’s FTSE MIB loses 1.20 per cent to 18,586, Britain’s FTSE 100 sheds 1.18 per cent to 6,921, France’s CAC 40 declines by 1.54 per cent to 4,954, while German DAX 30 falls by 0.97 per cent to 11,197. US stock index futures point to a significantly lower open.
The US 3Q GDP came in at 3.5% vs. 3.3% estimate with net trade subtracted 1.8% from the annualized number (the drag was the largest in 33 years), while inventories provided the biggest contribution since early 2015. Government spending rose the most since 2016. Core PCE was 1.6% versus 1.8% expected. Meanwhile, personal consumption increased by 4.0% vs 3.3% expected, the best reading since 2014. As the headline growth in the GDP was still solid and PCE came in below consensus, the overall picture was rather neutral and supportive for further gradual Fed rate hike. In a knee-jerk reaction, the greenback eased marginally against the European currencies and firmed against the yen. The general investor sentiment has improved somehow, and shares trimmed losses. On the whole, the buck failed to receive a boost from the release and traders refrained from a more emotional reaction.
EURUSD bounced marginally from lows around 1.1335 after the report but remained on the defensive because of still strong dollar coupled with risk aversion and Italian woes. Later today, S&P will announce updated rating estimate for a number of European countries including Italy, so there are still downside risks for the single currency in the short term. The 2018 low of 1.13 could be challenged should the agency revises Italy’s rating or/and outlook down. Otherwise, the buyers may be attracted by low levels and drive the pair in the direction of the 1.14 handle.
USDJPY stayed in the negative territory after the US GDP release, but trimmed intraday losses though. The pair reached a low of 111.86 earlier and now tries to get back above 112.00. The US data managed to improve investor sentiment a bit but it’s not enough to discourage the safe-haven yen demand, hence the short-term outlook for USDJPY still looks vulnerable and weak. There are still a number of risk factors in the global financial markets that could fuel a more aggressive sell-off in riskier assets down the road. A daily close below 112.00 will signal a cloudier technical outlook.
Brent crude recouped daily losses amid some USD weakness following the US data. The barrel registered a daily low at $75.80 earlier and jumped by 80 pips afterwards. The recent dynamics was on the back of dollar reaction to the GDP report, while the commodity market sentiment remains bearish as traders don’t see reasons to buy at this stage fearing that OPEC will increase crude oil production in the months ahead. The immediate risk event for the market is the Baker Hughes report. Should the release point to a rise in the number of oil rigs, the downside pressure on Brent could intensify, though the market reaction to this indicator has become more muted lately.
Gold price turned lower after the US GDP report but remained in the green on the daily charts. The yellow metal retreated from daily highs above $1238, still unable to challenge the key $1240 local resistance. The marginally improved investor sentiment has dented the bullish attempts. However, the bigger picture shows that the bullion still may attract demand down the road as the risk environment remains unstable and vulnerable. On the downside, the immediate support comes at $1225.
Nathan Lambert, Head of Global FX Analytical Department