Tuesday, October 1, 2019

Markets rise after conflicting reports from the US; will the euro continue to fall against the dollar?

  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: Equities surge while gold retreats

White House trade advisor Peter Navarro yesterday dismissed reports that the Trump administration is considering delisting Chinese companies from the US exchange, and equities rose as a result. Investors, it seems, interpreted Navarro’s declaration as an easing of tariff tensions between the US and China ahead of trade talks scheduled for the middle of October. The DJIA rose 0.36%, the S&P 500 advanced 0.50% and the Nasdaq gained 0.75%.

Safe havens retreated after the news, with gold dropping as low as 1464.49. The Dollar Index surged as high as 99.475 while US Treasury yields fell, with 10-year yields falling two basis points to 1.66%.

Germany’s inflation rate for September disappointed markets, growing only 1.2% year-on-year and missing estimates of 1.4%. The euro hit new lows against the dollar as a result, dropping to 1.0884’s level. Investors will be looking at Germany’s September Manufacturing PMI numbers later today for more evidence of a slowdown in the economy.

Several key reports are released today by the US, UK and Germany, along with the Eurozone’s Manufacturing PMI data and the Royal Bank of Australia’s monetary policy decision.

Today’s Analysis: What’s causing the euro to take a tumble?

Germany’s Harmonized Index of Consumer Prices (HICP), which is a measure of inflation, narrowly missed expectations of 1%, growing only 0.9% year-on-year. This pushed the euro down against the greenback to 1.08842, the lowest it has fallen in two years.

The currency has been plagued by multiple issues of late. As well as disappointing inflation levels in Germany, the ongoing Brexit saga and the World Trade Organization’s (WTO) list of EU goods that the US is able to target for tariffs have also sent it on a downward curve.

British prime minister Boris Johnson will reportedly reveal details of a proposed Brexit agreement to EU leaders this week and the British Chancellor of the Exchequer Sajid Javid has recently reiterated the government’s belief the UK will depart the EU on October 31st. What’s more, he explicitly stated the government will observe all laws, which suggest Johnson and his government are attempting to find a way to circumvent new legislation called the Benn Act, which requires the government to request yet another Brexit delay if no deal has been struck. Javid added there are plans for both a deal and no-deal Brexit that will look to minimise damage to the UK and other European economies. But the possibility of a no-deal Brexit is still on the table, which would negatively impact businesses in both the EU and UK that are not focused on domestic demand.

On Monday, Reuters reported the WTO will reportedly give the US the go-ahead to target US$7.5bn-worth of EU goods for tariffs, as a resolution to the US-Airbus dispute over illegal subsidies. The US has already published a list of goods it plans to target, such as aircraft parts and luxury items. If confirmed, this will be a record award for WTO but as the US shows no signs of a agreeing to a settlement, it may use tariffs to pressure the EU into a favourable trade deal instead, just as it has done to multiple other countries (China, Japan and Mexico).

The euro is already at a two-year low against the dollar. It has tumbled 5% so far in 2019, and has been pushed down by negative sentiment regarding the EU and a strong dollar.

The euro's slide against the dollar this year

The ECB is scheduled to have a monetary policy meeting on October 24th and will no doubt take into consideration such issues before determining the best way to sustain and stimulate the economy. Investors are likely looking at the ECB for a further cut in deposit facility rates and the possibility of fiscal stimulus from governments. But this is dependent on economic data released in the following weeks.

September’s PMI and Eurozone inflation data will be released later today, which will further hit towards the current state of the EU. A weaker than expected inflation rate will definitely drive the euro lower and we forecast it could potentially fall again in the short term, as a result of a stronger dollar(as a result of robust US economic data) and weak European data. Eurozone inflation is likely to disappoint, with Germany’s inflation a leading indicator.

PMI data may also underperform, as trade tensions and Brexit impact larger companies, which could cause contraction across industries. As trade discussions between the US and China escalate, the dollar may also strengthen, which will send EUR/USD even lower. Following weak economic data, the euro may fall past 1.083’s level against the dollar. In the medium term, we forecast the euro to continue its slide against the dollar based on Brexit no-deal concerns, plus an escalation of tensions between the EU and US. It could even reach levels of 1.05, which we’ve not seen since the early days of Brexit in 2016.