European stocks extend their gains on Tuesday, with carmakers lead the way higher as investors cheer the NAFTA deal between the US and Mexico that could ease tensions between Washington and Brussels. The “Mexican factor” has also fuelled risk appetite across the global markets in the context of the US-China trade war – investors hope for some progress on this front either. However, the risk-on rally looks rather tepid, following fresh records on Wall Street on Monday as the US-Canadian issue remains unresolved, while the risk of a “no-deal” Brexit persists.
As such, Britain’s FTSE 100 adds 0.31 per cent to 7,601, France’s CAC 40 gains 0.28 per cent to 5,494, while German DAX 30 rises by 0.17 per cent to 12,559. Italian stocks remain on the defensive, with MIB loses 0.50 per cent amid concerns over the issues of the Italy’s populist government with the EU officials. US stock index futures set for a modest rise at the open as trade-war fears have eased after a deal with Mexico. By the way, Mnuchin recently mentioned that he doesn’t anticipate a lot of problems with Canada on NAFTA.
The greenback continues to extend losses against major currencies as the currency demand has abated amid the risk-on sentiment across the board. The bearish pressure has intensified after Trump announced a trade agreement with Mexico, which added to the positive market sentiment. As risk trends remain the key driver for the markets now, the buck is vulnerable to further losses in the short term unless fresh bearish signals emerge and fuel dollar demand.
The EURUSD pair jumped to August high of 1.1720 and remains supported by the broad-based dollar weakness. So the rally in the pair is advancing for a third week in a row, recovering from 13-month lows around the 1.13 threshold. The positive investor sentiment coupled with renewed bearish bias in the buck fuel the euro rally. But there is a risk for the pair which could come from Italy. In particular, a tough stance of the country’s government on immigration along with budget issues shave sent the Italian 10-year bond yields to the levels last seen back in May 2014. So further rise in the yields may dent the pair’s rally as well as the potential dollar rebound should the investor sentiment turn sour in the coming days.
The pound is on the rise as well, but the impetus looks limited which confirms that investors remain cautions amid the rising risk of a “no-deal” Brexit. In an attempt to play down Chancellor Hammond's warnings of major economic consequences, Prime Minister Theresa May has dismissed fears of a no-deal Brexit apocalypse and said ttah such an outcome would not be the end of the world. But this is hardly enough to ease market fears, especially when the government itself looks to be preparing the citizens to the worst-case scenario. GBPUSD has recovered above the 20-DMA and is testing the 1.29 threshold which looks rather tough to break so far, despite the bearish USD sentiment. On the other side, a daily close above the moving average will be a sign that the price may yet to stage a sustainable rise above 1.29, with the next target at 1.2940.
Brent crude has challenged the $77 handle, and the sentiment in the commodity markets remains elevated. This is in many ways due to the positive market sentiment globally as oil prices feel the support from the risk-on trading. The downside bias in the dollar adds to the buying pressure on Brent as well. Meanwhile, traders shift focus to the API and EIA inventory data due today and tomorrow, respectively. Further signs of a decline in the US crude stockpiles will fuel the ongoing rally. As a result, the key $80 barrier could get back into market focus. But bulls should be careful as the fear of this psychological mark may trigger a wave of profit-taking at attractive levels.
Nathan Lambert, Head of Global FX Analytical Department