European shares dropped to ten-week lows on Wednesday after China warned Beijing was ready to use its supply of rare earth’s in the trade dispute with the United States. As a result, investors rushed for safe havens across the markets. The additional negative pressure comes from tensions between the Washington and Tehran, as U.S. National Security Advisor John Bolton said attacks on four tankers off the United Arab Emirates coast of Fujeirah earlier this month were most likely the work of Iran. In the region, the EU is considering disciplinary action over the Italian government’s failure to rein in debt, which adds to the negative sentiment in the market.
Against this backdrop, the UK’s FTSE 100 sheds 1.52 per cent to 7158, Italy’s FTSE MIB loses 1.47 per cent to 19,962, France’s CAC 40 is down 1.87 percent to 5,213, while German DAX 30 declines by 1.46 per cent to 11,851. US stock index futures are sharply lower as well - bond yields fell and triggered renewed concerns over the economic outlook, in addition to increasing US-China trade tensions.
The dollar remains on the offensive against the European rivals and extends losses against the Japanese yen. Against the backdrop of aggressive risk aversion, USDJPY is coming closer to the 109.00 support once again. Should the trade tensions escalate further I the short-term, this handle could be tested. If so, the technical outlook for the pair will deteriorate further. Despite the prices have bounced from lows, they struggle to make a meaningful recovery as the yen continues to outperform its rivals amid a widespread risk aversion. By the way, the 10-year US Treasury bond yield is down more than 1%, at its lowest level since September 2017 at 2.226%.
EURUSD has challenged the 1.1150 area earlier in the day and remains depressed on Wednesday though the negative pressure looks marginal. The euro came under additional pressure after disappointing data from the German labor market, where the unemployment increased by 60K in May and the jobless rate ticked up to 5.0%. Another portion of dismal data from the region’s largest economy add to concerns over the possible recession in the Eurozone. Meanwhile, European Commission has sent a letter to Italy on violation of debt-reduction rules. As a reminder, the EC is said to possibly consider a fine on Italy worth around €3.5 billion. Additionally, ECB's Rehn said that first rise in interest rates is now further away than it was a few months ago.
Brent crude is nursing heavy losses on Wednesday as traders proceeded to profit-taking after a pause. Risk-off sentiment, which continues to be the major theme in the global markets today, is also putting a major pressure on oil prices. Given that Brent returned below the 100-DMA, there could be more steep losses in the short term. Meanwhile, in the medium term, Iranian sanctions and the potential extension of the OPEC+ deal should cap the selling pressure as the dust settles. Technically, the immediate support now comes at $66-65.90.
Nathan Lambert, Head of Global FX Analytical Department