• The re-escalation in trade tensions between the US and China in combination with re-emerging political uncertainty in Europe are the key themes in the financial markets. Following Trump's decision to impose tariffs on Chinese imports the two nations are engaging in a tit-for-tat exchange of further threats for retaliation dampening investors' appetite. At the same time, German Chancellor Merkel is facing a hard time keeping her junior coalition partner CSU happy in regards to a tougher immigration policy. The German DAX was down 1.36% yesterday and this morning futures are indicating a bearish opening.
• Currencies came under pressure over the past 24 hours with the Yen gaining across the board and the commodity dollars taking much of the heat as investors are looking for safe havens. Remarkably, the Euro was able to withstand the pressure from the bearish German and global news edging above 1.16. This action could suggest that longer-term focused investors have taken advantage of the dip to 1.1550 to establish long positions; the ECB will stay put for now but for portfolios focused on a 3-5 years' horizon a long Euro is not a bad bet.
• Nevertheless, the short term bias for the single currency remains bearish and the Euro's success in staying afloat has to be attributed more to Dollar's lack of momentum at this time. Short term studies suggest a strong, intra-day resistance at the 1.1650 area and if the Euro fails to overcome this level then a retest of the 1.16 and possibly 1.1550 levels is the next step.
• The Japanese Yen is leading the gains over the past 24 hours receiving strong risk-off inflows while Dollar's lack of momentum works in the currency's favor. The break of the 110.00 support was a key technical trigger and - unless we get a swift reversal - the Dollar/Yen is heading towards the 109.30 mark as highlighted yesterday. Furthermore, the currency has broken out of the ascending channel capping its price action since the start of the month prompting technical traders to exit their long positions. There's nothing in the news in terms of fresh reports pending for release and this reinforces our view that more downside is possible.
• Oil is rallying after news that Russia and Saudi Arabia have agreed on raising production caps at a lower degree than initially expected. This has helped prices recover to the $65 area but the key question now is whether the commodity will be able to re-establish a bullish trend. The $65.80 level is a key technical resistance and the 200-period moving average also converges around this level so a break above it will be key in suggesting further gains. We're looking at two scenarios: a break above $65.80 points towards $67 and potentially $68.50 while a rejection of the $65.80 resistance will lead prices towards the $64 mark again.
• Equities had a bad day yesterday and the Asian markets are trading below water this morning; investors are looking to reduce their exposure on higher beta stocks as the re-escalation of tensions between the US and China are threatening to lead to a full scale trade war. Equity traders are concerned that a full-blown, global trade war will take its toll on global growth and indeed it wouldn't take too much of a reduction in US products' demand to send the country into a recession. The European and US futures are pointing lower reflecting this uncertainty with most US markets expected to open one percent lower.

MARKET EVENTS TO WATCH

• ECB President Draghi speaks in Sintra, Portugal - 12pm

• US Housing Starts/Building Permits - 4.30pm

All times are GMT +4.