Amidst the prospects of ongoing global ‘trade wars’ and the political uncertainty stemming from the Italian elections, European equities saw a pessimistic open following a similar tone in the Asia-Pac session. As of now, major bourses have pared back earlier losses (Eurostoxx 50 +0.4%) with the exception of FTSE MIB (-1.0%) as a clear underperformer. Financials lag with banks amongst the worst performers on the FTSE MIB with Banco BPM (-6.7%), BPER Banca (-5%), Ubi Banca (-4.7%) seen at the foot of the index dragged down by the Italian elections. The Berlusconi-controlled Mediaset (-5%) are also lower following projections showing the centre-right coalition fronted by the former PM falling short of an absolute majority. Following US President Trump’s latest threat to hike tariffs in EU auto imports, German auto names are underperforming with DAX 30 heavyweights BMW (-1.2%) and Daimler (-0.3%) seen lower.
The DXY has recaptured 90.000+ status (just) after last week’s roller-coaster ride when the index almost recovered to 91.000 before recoiling on US President Trump’s plans to slap import tariffs on steel and aluminium that sparked another wave of global trade war and protectionism jitters. However, the latest Dollar revival is largely due to the Eur’s demise and weakness in wake of no clear result at the weekend Italian general election. Eur/Usd is trying to keep hold of the 1.2300 handle, but has been down to 1.2270, with some also noting that AXA’S $15 bn bid for XL may have been a factor. Meanwhile, Eur/Jpy breached strong technical support at 129.50 on its way down to a circa 129.35 low before what looks like a short-covering bounce. Elsewhere, the Nzd, Aud and Cad are G10 underperformers after Chinese PMI misses and a general risk-off tone on the Trump proposals and pledges of retaliation, with the Kiwi only just keeping its head above 0.7200 vs the Greenback, Aud/Usd trading below 0.7750 and Usd/Cad at fresh 2018 highs around 1.2910 and just shy of key resistance in the 1.2915-25 area. The Jpy and Chf are both benefiting from their safe-haven appeal, with the former around 105.50 vs the Usd (strong barriers still reported at 105.00) and the latter within a 0.9750-85 range vs its US counterpart. Cable hovering either side of 1.3800 and Eur/Gbp still above 0.8900 between 0.8905-50 with Sterling continuing to be hampered by Brexit uncertainty amidst more reports about the EU’s hard-line stance on transition terms and conditions.
A sharp pull-back in Bunds and back down below 160.00 with little fuss, as the core EZ bond trades in lock-step with Italian BTPs that have recouped a lot of their election fall-out losses to sit near the top of a 136.71-135.90 range vs last Friday’s 137.22 close. The German 10 year debt future just retreated to 159.81 having failed to test rising channel resistance around 160.45 or the 50% retracement at 160.52 with the high at 160.38. Similarly, Gilts have fallen back from 121.93 Liffe highs to 121.52 (-8 ticks), but didn’t really track the initial/early rally with as much vigour due to ongoing Brexit factors, in contrast to US Treasuries that remain firm and still in bull-flattening mode amidst heightened global trade war risk and ramifications. Note, a knee-jerk downward reaction in UK bonds on the much better than expected services PMI that boosted the composite reading, but not enough to warrant IHS Markit changing its Q1 GDP forecast much from the previous quarter (almost 0.4% q/q vs 0.4% q/q respectively). Back to Eurex, there is a chart gap down to 159.65.
WTI and Brent crude futures traded higher despite the firmer USD as Libyan supply disruptions provide some reprieve after Libya’s Sharara oil field (largest in the nation) has halted pumping crude amid domestic protests. However, it was then later reported that production has resumed at the oil field. In terms of other energy newsflow, the IEA have upgraded their US oil output growth estimates by over 2mln bpd through 2023. Focus ahead will be on any comments from the meeting between OPEC and US shale producers as both sides look to address the ongoing global oil glut. In metals markets, gold prices remain modestly supported by the general risk tone with gains capped by the firmer USD. Elsewhere, Chinese steel futures were seen lower for a second consecutive session as demand in the region remains soft and despite China announcing that they will reduce around 30mln tonnes of steel capacity this year. Focus going forward will be on how Trump views/responds to threats made by the EU and Canada over counter-measures to last week’s tariff announcements.