European markets edged higher at the open on Wednesday but failed to gain momentum and show a mixed and rather muted dynamics during mid-morning deals amid the lingering uncertainty ahead of G20 Summit. Investors are also keeping an eye on developments in Italy, UK and US-China trade rhetoric. There are some conflicting signals from this front as Trump said it was “highly unlikely” the US would delay increasing tariffs from 10% to 25% on $200 billion of Chinese goods, while White House economic advisor Larry Kudlow told later that Washington has resumed the dialog with Beijing at all levels.
Meanwhile, in Europe, Italy’s Di Maoi noted that the government cannot betray promises to citizens. On other words, Rome doesn’t want to reduce the deficit target more dramatically despite the threat of sanctions from Brussels. So, the standoff continues and could yet hurt investor sentiment in the near future. So far, Italy’s FTSE MIB is flat at 19,149, Britain’s FTSE 100 sheds 0.19 per cent to 7,003, France’s CAC 40 adds 0.25 per cent to 4,995, while German DAX 30 gains a mere 0.04 per cent to 11,314. US stock index futures post gains ahead of opening bell as market participants hope for a breakthrough in US-China trade relations.
The UK government released its analysis on Brexit scenarios. According to the document, May’s Brexit plan will reduce GDP by 2.1% to 3.9% in 15 years’ time. At that, the officials highlighted that the prime minister’s modeled plan is better than a regular free trade agreement but worse than the UK choosing to stay in the EEA, while a no-deal “divorce” would mean economy is 7.7% smaller in 15 years' time. Due to its long-term horizon, it’s hard to estimate the published analysis from the point of view of short-term behavior of the sterling. The fact that the country’s GDP will finally contract is nothing new for the markets. The pound rebounded swiftly after the release and touched daily highs marginally above the 1.28 barrier. However, the aggressive rebound took place rather as a result of failure to drive the price below the 1.2730 region from where it was rejected. Despite the current local rally, it’s better not to expect much upside potential from GBPUSD at this stage as May's chances of winning a meaningful vote in parliament are still low. As such, the possibility of a steady recovery above the 1.30 figure is very slim now.
EURUSD continues to suffer from the ongoing standoff on the Italy’s budget. Lack of actual progress in negotiations with EU officials makes the euro vulnerable to further losses as Brussels could launch an excessive deficit procedure before Christmas. Should Rome refuse to make more dramatic concessions, sanctions will follow. Another source of downside risk for the single currency is the potential boost for the greenback from Powell’s testament today and FOMC meeting minutes tomorrow. Should the Fed Governor alleviate market concerns over further tightening in the US, the buck will rally across the board. Otherwise, the pair will be able to stage a recovery above 1.13 but it will only become a selling opportunity due to strong European risks.
As for the dollar itself, there is a factor that could dump it next week. The Congress should pass several bills by 7 December or otherwise it will face a risk of a partial government shutdown. So far, investors are disregarding this risk event citing the previous similar cases. Anyway, ahead of the deadline, the markets may get more nervous, and such an environment will be harmful for the greenback.
Meanwhile, crude oil prices continue failed recovery attempts. The recent corrective rebound has faced a resistance in the $61.40 area, with Brent turned negative on the day, threatening the $60 figure once again. It looks like the market participants were not impressed by Saudi oil minister’s verbal intervention. He pointed that 2019 will be a year in which oil market is very stable. It’s not surprising that Saudi Arabia tries to talk up a bullish rhetoric in the market but traders are more concerned about more short-term prospects and prefer not to take risks ahead of G20 Summit and OPEC meeting in Vienna.
Nathan Lambert, Head of Global FX Analytical Department