Oil soared Friday on growing supply tightening and...
18/02/2019 - 19:30
Market analysis
Jan
22
Europe slumped early Tuesday on subdued global cues amid renewed US-China cold/trade war tensions
The European market (Stoxx-600) is currently trading around 356.00 in the EU session, edged down -0.10%. Earlier Tuesday, it slumped to a low around 354.70, slips by almost -0.45% on subdued global cues amid renewed US-China cold/trade war tensions coupled with disappointing report card from UBS and lower oil (as IMF downgraded global GDP for 2019).
As per reports, the US will proceed with extradition request for the arrested Huawei executive in Canada. The arrested Huawei CFO Meng is being detained on charges related to Huawei "allegedly stealing trade secrets from U.S. business partners, including the technology for a robotic device called "Tappy" that T-Mobile US used to test smartphones”.
The market is concerned that Trump may use the Huawei CFO arrest/extradition as leverage in trade talks, which could infuriate China and pour cold water on the whole story of US-China trade truce progress. On Monday, the “risk-on” trade was already under some stress on a report that despite growing optimism story about the US-China trade truce progress, on the vital issue of IP protection, there is absolutely no progress as reported by the US Treasury to the US Congress. China officials have denied such IP theft allegation and asked the US for proof.
On Tuesday, when China foreign ministry was asked about retaliation for Huawei CFO Meng, it replied: “China hopes that the US would correct its mistake immediately and what it has done is wrong and Canada and the US will correct their wrongdoing”.
On Monday, the European market (Stoxx-600) closed around 356.36, edged down -0.19% on subdued economic data from China, lingering Brexit jitters and lower GDP forecast by the IMF. The IMF has projected the 2019 GDP growth for the Eurozone at +1.6% from prior +1.9% and the overall global GDP growth was downgraded to 3.5% from prior to 3.7%.
The IMF noted that:
“We have revised downwards our forecasts for advanced economies slightly, mainly due to downward revisions for the euro area. Within the euro area, the significant revisions are for Germany, where production difficulties in the auto sector and lower external demand will weigh on growth in 2019, and for Italy where sovereign and financial risks—and the connections between them—are adding headwinds to growth”.
“China’s growth slowdown could be faster than expected especially if trade tensions continue, and this can trigger abrupt sell-offs in financial and commodity markets as was the case in 2015–16. In Europe, the Brexit cliffhanger continues, and the costly spillovers between sovereign and financial risk in Italy remain a threat. In the United States, a protracted US federal government shutdown poses downside risks”.
Overall, IMF is quite concerned about Trump trade war, Fed’s hawkish monetary policy (dual QT), Brexit hangover, and Italian threat if fiscal indiscipline and US political jitters (shutdown) and it called for an immediate truce in US-China trade/cold war coupled with an indirect urge for the Fed to pause. The IMF also painted a subdued picture of the Eurozone recovery amid ongoing US-China trade war tensions and Europe’s own issues, like Brexit, German auto emission, growing “yellow vests” protests (anti-establishment) and Italian issues.
EUR and the European stock market is also a China sensitive as the Eurozone is now one of the largest trading partners of China. On early Monday, data shows that the Q4 China GDP grew at +6.4%, edged down from prior +6.5%, but was right on the expectations. The December Chinese industrial production surged to +5.7% from prior +5.4%, higher than the expectations of 5.3%. The December China retail sales grew by +8.2%, edged up from prior +8.1%, just right on the expectations. The China unemployment rate for December edged up to 4.9% from prior 4.8%. The December China fixed asset investment was unchanged at +5.9% lower than the expectations of 6.0%.
China’s GDP growth slipped to 6.4% in the Q4, the lowest rate since the global financial crisis as the trade war with the US hit consumer sentiment even as full-year growth of 6.6% exceeded Beijing’s target of 6.5%. The Chinese GDP growth has slowed for three consecutive quarters, prompting concern that China could drag the global economy downward. The 2018 GDP growth of +6.6% is the lowest official pace in 28 years.
Germany 30
On Monday, Germany’s DAX-30 tumbled -0.62% to close around 11136.20, near the session low of 11125.53; earlier it made a session high of 11179.91. Being export savvy and China sensitive, the German market was dragged most. Henkel plummeted on guidance warning amid higher capex for brand promotion and digital tech. Deutsche Telekom tumbled on analysts downgrade. The German market was supported by banks & financials, media, foods & beverages, while dragged by consumers & cyclical, telecoms, utilities, and automobiles.
France 40
France’s CAC-40 slumped -0.17% to close around 4867.78. The French market was dragged by healthcare, utilities (water & gas) and financials.
Italy 40
Italy’s FTSE MIB-40 slips -0.35% to close around 19638.64. Looking ahead, Italy could be a major headwind for the ECB/Euro. In its latest projection, the IMF has projected the Italian GDP growth much lower than the Italian government assumption. The IMF has projected 1.0% (2018), 0.6% (2019) and 0.9% (2020) for Italy and mentioned it as a “prime risk” for the global/EU economy.
On late Monday, Italy’s economy/finance minister Tria countered the IMF criticism and said: “Italy does not pose risk to European/global economy, but policies recommended by IMF pose economic risks. Italy is working on rules to face possible hard Brexit. Italian public finances not at risk and it is completely wrong to discuss now of additional budget measures for 2019”.
In the May EU Parliament election, Italy’s populist leaders (Eurosceptics) will lead and as per a recent survey, populists may win close to 23-25% this time against 14% prior. This could be negative for the Euro in the coming days coupled with the lingering Brexit squabbling.
UK 100
The UK’s FTSE-100 ticked up +0.03% on hopes of a delayed Brexit or no-Brexit at all, even as the UK’s PM Theresa May is busy with her so-called Brexit Plan-B (which is nothing but the same old wine in new bottle). But industrials, homebuilders jumped on May’s Brexit Plan-B, while exporters/MNCs were dragged by higher GBP, coupled with miners on subdued China GDP data. Energies helped on higher oil amid increasing optimism about US-China trade truce.
GBP/USD
GBPUSD surged as Theresa May indicated she would be more "flexible" with lawmakers, even though she refused to rule out a no-deal Brexit. There are few signs she can break a deadlock with parliament after her Brexit deal was rejected last week. May offered to tweak her defeated deal by seeking further concessions from the EU on a backup plan (backstop) to avoid a hard border in Ireland.
But, the EU is now actively taking all the required steps to deal with a no-deal hard Brexit. On Monday, Ministers at the Eurogroup heard from the EC about contingency planning measures for Brexit. The Eurogroup said: “It is important for us to be ready for all scenarios, including a no-deal Brexit, which we all want to avoid”. GBPUSD surged +0.30% to close around 1.2891 on Monday.
On early Tuesday, GBPUSD edged up +0.20% and is currently trading around 1.2915 on upbeat UK wage growth and increasing hopes of delayed Brexit.
The materials contained on this document are and not made by iFOREX but by an independent third party and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results.
For the full disclaimer Click here.
Recent Events In The Economic Calendar:
Back to Financial News
Join Our Community