Macro economics

Analytics on 17/05/2019. China spooks investors, Brent remains elevated despite risk aversion

European equity markets are back under pressure on Friday, after a brief recovery yesterday. As trade war remains in markets’ focus, further escalation in the trade spat between the world’s two largest economies continues to hurt investor sentiment across the globe. China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, which fueled another wave of risk aversion. On the Brexit front, meanwhile, talks between the Conservatives and Labour are likely to break down without a deal today as neither party having conceded significant ground.

Against this backdrop, Italian FTSE MIB sheds 0.47 per cent to 20,051, the UK FTSE 100 declines by 0.35 per cent to 7,327, France’s CAC 40 is down 0.45 percent to 5,423, while German DAX 30 loses 0.82 per cent to 12,209. Following three consecutive sessions of gains, US stock index futures also retreat as Chinese state media signaled a tougher line on the trade dispute.

EURUSD lost the 1.12 handle on Thursday and extends losses today, with the pair refreshed two-week lows below 1.1160. The upside momentum around the greenback stays strong at the end of the week, with the USD index rose to fresh highs around the 98.00 figure, sending the common currency lower. Besides, political issues in Italy add to the negative pressure on the euro ahead of next week’s EU parliamentary elections. On the data front, the Euro zone core CPI for April was revised to 1.3% from 1.2%. Construction output also came in higher than expected but positive reports failed to give a lift to the common currency driven by dollar strength. Now, the 1.12 level acts as the immediate resistance. As long as the pair stays below this handle, the downside risks persist.

Brent crude edged higher yesterday, hit resistance at $73.34 and then pulled back below the $73 handle. On Friday, the prices continue to challenge the psychological level and show a bullish bias but the upside impetus looks limited amid the US-China trade war escalation. On the other hand, the market is still supported by the rising geopolitical tensions in the Middle East. A Saudi-led military coalition in Yemen carried out several air strikes on the Houthi-held capital Sanaa yesterday after the Iranian-aligned movement claimed responsibility for drone attacks on two Saudi oil pumping stations earlier in the week.

Now, investor focus shifts to OPEC – the ministerial monitoring committee meets in Saudi Arabia this weekend. Depending on the tone of the participants, Brent could open with a gap next week. Technically, Brent needs to hold above the $72.30 handle in order to remain afloat. The immediate event in the indusrty is the weekly Baker Hughes report due later today. A decline in the oil rig counts could give some support to the market.

Nathan Lambert, Head of Global FX Analytical Department

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