President Trump's threat to raise the tariffs on Chinese imported goods took investors by surprise dampening risk sentiment at the start of the week. The US President was angered that China was attempting to renegotiate the proposed deal and threatened to undo months of progress, driving market participants towards safe havens. The Dollar was mixed against most of its peers, as China's decision to attend this week's round of talks in the US, despite Trump's threats, has somewhat eased the risk off bias during the latter part of the day. Equities closed in the red but well off their session lows, Gold and Oil advanced.
Amid a bearish risk sentiment, the Euro as able to post gains versus the Dollar during the first trading session of the week. Better than expected retail sales figures from the Eurozone and a broadly steady PMI printing from Germany and Italy helped the shared currency advance above 1.12. Does that change the outlook for the Euro though? We believe that the direction for the currency still points lower in the medium term based on interest rates' differentials and stronger growth in the US; having said that, Mario Draghi's speech tomorrow will be an important event to monitor.
Should the head of the ECB discuss the recent uptick in domestic growth, he will be providing a much-needed boon to the shared currency. However, it's equally likely that Draghi is still concerned about the lack of inflation in the euro area and with interest rates at zero, he has to find other ways to stimulate growth. As such, any references on the need for a more generous TLTRO program in June will again send the Euro lower. In the short term, the 1.1230 and 1.1250 levels of resistance seem to be capping the upside for the Single currency.
Meanwhile, the Dollar started the week on the defensive against the Yen. Prices for the currency pair dropped below 111 when the Asian markets opened for trading on Sunday. Traders looked for refuge in the safe haven Japanese currency on the back of Trump's threats to re-escalate the trade dispute with China and the break below 111 is considered an important technical trigger. Furthermore, the fact that the currency pair attempted to recover above this level during yesterday's session and failed hints on more downside. The level to watch is the 110.30 lows and, below that, support can be found at 109.80.
Gold remained above $1,280 during the first session of the week but the question becomes whether the yellow metal can stage a more meaningful recovery. Rising geopolitical tensions are always a positive catalyst for Gold's prices but there's a substantial resistance found at the $1,288 area, which needs to be overcome for more gains to be expected. Should this happen though, an extension towards $1,300 can be seen; otherwise a move to $1,280 will be next. Oil was able to climb above $62 yesterday and if prices manage to hold above this near-term support over the next 24 hours and break above $63, then a rally towards $65 seems likely.
Finally, equities ended the day in the red but as we mentioned above, most indices were able to come off their session lows during the course of the day. Trump's decision to threaten China with more levies, in light of what he regards as slow progress in the trade talks, forced investors to go on defensive mode. This morning, equity futures continue to point lower but Chinese negotiators' decision to travel to the US as planned for this week's round of talks helps prevent a broader selloff. In any case, equities will take their cue from fresh news from this front and, until we get some positive headlines, the near term direction points to the downside.
MARKET EVENTS TO WATCH
- Germany Construction PMI - 11.30pm
- US Consumer Credit - 11pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research