European markets are little changed on Thursday as stocks struggle for direction amid thin trading conditions due to a holiday in the US. There is some uncertainty on the political front after Trump wrote in a tweet yesterday that «China and Europe are playing big currency manipulation game and pumping money into their system in order to compete with USA». This statement sparked concerns that Washington may raise tariffs on Europe. As a reminder, in May, Trump administration proposed tariffs on goods from countries found to have undervalued their currencies against the dollar, while last year, the US President threatened to slap a 25% tariff on car imports from the European Union. Earlier this week, the U.S. government threatened tariffs on an additional $4 billion of EU goods. The hostile rhetoric by Trump reduces the appeal of European stocks as fears of further escalation of tensions are rising.
Against this backdrop, the UK’s FTSE 100 adds 0.12 per cent to 7618, Italy’s FTSE MIB gains 0.57 per cent to 22,032, France’s CAC 40 rises by just 0.03 percent to 5,620, while German DAX 30 gains 0.09 per cent to 12,628. US markets are closed in observance of Independence Day.
On the data front, Eurozone retail sales dropped -0.3% mom in May, below expectation of 0.4% mom rise. Sales fell for the second month in a row, which can be seen as a sign that consumer spending is weakening in the region. At that, the dismal figures were partially offset by retail sales for April revised up to -0.1 per cent from -0.4 per cent. Meanwhile, the European Central Bank Vice President De Guindos said that risks to economic growth are tilted to the downside, and the Euro area’s ongoing economic recovery faces renewed global headwinds that are weighing on the economic outlook.
However, the euro barely reacted both to the bearish report and the dovish statements and continued to recover towards the 1.13 handle. In part, the common currency is supported by a subdued dollar demand amid rising expectations of a rate cut by the Fed and the lack of buyers due to a national holiday in the US.
Next, market focus will shift towards the key US jobs report due on Friday. Traders are looking for the US Nonfarm payrolls to increase by 150-160k in June, following the soft 75k print in the previous month. If the numbers come lower than expected, the dollar will get under the downside pressure across the board as rate cut expectations will rise further. In this scenario, EURUSD could easily regain the 1.13 figure but will have to confirm a bullish break by daily closure above the 1.1320 area.
Meanwhile, Brent crude recovers back towards the $64 level where the futures were rejected yesterday. Oil traders remain skeptical as economic concerns overweigh the optimism around the OPEC deal extension. A smaller-than-expected draw in US crude stockpiles adds to the negative pressure. Against this backdrop, the upside potential remains limited while bearish risks persist.
Nathan Lambert, Head of Global FX Analytical Department