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Europe Edged Down Monday On Higher EUR And The Lingering Concern Of Subdued Econom

Published 01/09/2019, 03:43 AM
Updated 09/16/2019, 09:25 AM

The European market (Stoxx-600) closed around 342.88 Monday, edged down -0.15% on higher EUR and GBP (local currencies) and the lingering concern of subdued Eurozone economic growth coupled with US-China cold/trade war jitters.

On early Tuesday, Stoxx-600 jumped almsot+0.70% on lower EUR, hopes US-China trade truce and Italian banks as the government there moved in support of troubled lender Carige. The Italian government approved late on Monday a decree (legislation) aimed at shoring up the bank, offering it access to a series of state-support options including recapitalization in Carige. Retailers are also helping despite disappointing guidance (Xmas sales) from the UK’s supermarket group Morrison.

The US dollar index (DXY) plunged almost -0.50% in the EU session on broad weakness in the greenback on hopes of a Fed pause in 2019 as Powell sounds “patient and flexible” on Friday. EURUSD soared almost +0.70% despite subdued Eurozone economic data, but upbeat retail sales also helped. GBPUSD also jumped around +0.30% despite lingering Brexit jitters, while USDJPY sinks almost -0.20%. A lower USD (i.e. higher local currencies/EUR/GBP) is negative for the export savvy European market.

The market was also concerned that due to intensifying US political jitters for the Mexican border wall saga and subsequent partial government shutdown, Trump is too busy to focus on the China trade negotiation front and thus the present vice-ministerial level trade talks are nothing but a waste of time. The European market is sensitive to trade wars/tariffs as the US and China contribute almost 33% of its total trading volume.

The market was under stress on lingering US political saga (partial government shutdown), and renewed concern of US-China cold war as China’s President Xi reportedly asked his Army to be prepared for a “war” with American/Trump aggression! Meanwhile, as a US delegation led by senior trade officials arrived in Beijing on Monday to begin the first round of in-person talks to resolve the burgeoning US-China trade war, the US has reportedly carried out its latest 'Freedom of Navigation' operation in the South China Sea, which China dubbed it a “provocation”.

As a result, “risk-on” trade was under renewed stress and Nikkei/Stoxx future slips from earlier highs, although the Dow future was stable as the US dollar index (DXY) slips -0.25%. USDJPY slid -0.30%, while EURUSD surged almost +0.30% and GBPUSD gained +0.15% in the early EU session Monday.

The USDCNH also slid around -0.25% and was trading around 6.8455 around 1-month high, primarily putting pressure on the greenback on hopes of a Fed pause in 2019. On Friday the Fed Chair Powell almost signaled that the Fed will take a pause in Q1-2019, although it may hike twice in the year (Q2/Q4) against four quarterly hikes in 2018.

Meanwhile, China said it has "good faith" to work with the US to resolve trade frictions; The US officials are meeting their counterparts in Beijing this week for the first face-to-face talks since the US President Trump and China's President Xi agreed in December to a 90-day temporary truce. Chinese Vice Premier Liu He unexpectedly attended the first day of talks to discuss topics including IP, agriculture and industrial purchases.

While no breakthrough is expected at talks this week, they will lay the ground for senior-level discussions later this month, and a possible meeting between President Trump and China’s Vice President Wang at the World Economic Forum in Davos.

Elsewhere, the US Commerce Secretary Ross commented on Monday that the Real China issue is enforcement on promises and there is a very good chance of a good settlement with China on immediate trade but structural issues and compliance are harder as China now understands how dependent its economy is on the US.

On Friday Stoxx-600 jumped +2.83%, the biggest single-day gain since June’16 on global/US “risk-on” sentiment amid Powell/Fed “patience and flexibility” coupled with US-China trade truce optimism.

On Monday, the European market was dragged by healthcare, food & beverages, exporters, MNCs while helped by banks (higher Bund yields), trade-sensitive basic materials, techs, Chipmakers, and energies to some extent (higher oil). Overall, in Q4-2018 as-well-as for the entire 2018, Stoxx-600 plunged almost -13%.

On Monday, Apple/iPhone suppliers AMS soared most in Stoxx-600 after announcing a technological tie-up with Chinese software maker Face++ for the 3D facial recognition features for smartphones. Adyen, Wirecard surged on analysts’ upgrade, while Centrica (LON:CNA) and tyre-makers such as Pirelli, Michelin (PA:MICP), and Gestamp tumbled on analysts’ downgrade. Tyre-makers were in stress on slowing Chinese sales, and growing EU regulatory headwinds. Cigarette makers such as BAT (LON:BATS), Imperial Brands (LON:IMB) were also under pressure on analysts’ downgrade.

Germany 30

Germany’s Dax-30 edged down -0.18% to close around 10747.81 and made a session low-high of 10681.27-10814.47 in a day of volatile trading. Germany was supported by techs, retails (upbeat retail sales data) and media, while dragged by insurance, food & beverages and consumer & cyclical. Export savvy Germany was also affected by higher EUR, lingering US-China trade/cold war tensions and mixed/subdued economic data. The German composite PMI slumped to 51.6 and was at a 66-month low on lingering China trade war issues and auto-emission regulatory jitters. Overall DAX-30 tumbled almost -15% in Q4-2018, while lost over -18% in 2018.

Germany 30 Chart Pivot: 10920 Support: 10730 10670 10600Resistance: 11000 11085 11150 Scenario 1: STRONG ABOVE 10920 AND SUSTAINING ABOVE 11000-11150, DAX-30 MAY FURTHER SURGE TO 11255/11355/11450/11575 IN THE NEAR TERM Scenario 2: WEAK BELOW 10895-10880 AND SUSTAINING BELOW 10730-10600, DAX-30 MAY PLUNGE TO 10550/10480/10250/10000-9900 IN THE NEAR TERM Comment: SHORT TERM RANGE:10250-11000

France 40

France’s CAC-40 slumped -0.38% to close around 4719.17 and made a session low-high 4690.22-4760.27 in a day of volatile trading. France was dragged by basic materials, consumer goods & services and healthcare coupled with a terrible composite PMI at 48.7, at deep contraction and at a 49-month low due to lingering “Yellow Vests” protests. Overall, CAC-40 plunged almost -14% in Q4-2018, while lost almost -11% in 2018.

France 40 Chart Pivot: 4825 Support: 4705 4670 4600Resistance: 4890 4925 4965 Scenario 1: STRONG ABOVE 4825 AND SUSTAINING ABOVE 4890-4965, CAC-40 MAY FURTHER SURGE TO 5040/5115/5180/5260 IN THE NEAR TERM Scenario 2: WEAK BELOW 4800 AND SUSTAINING BELOW 4705-4600, CAC-40 MAY FURTHER 4550/4450/4400/4340 IN THE NEAR TERM Comment: SHORT TERM RANGE: 4550-4825

Italy 40

Italy’s FTSE MIB-40 jumped almost +0.65% to close around 18953.27 and made a session low-high of 18800.20-18968.04. As per ISTAT, the public deficit/GDP decreases to -1.7% vs prior -0.6% (revised from +0.5%). This is positive for the Italian public debt/fiscal discipline. The Italy/German spread is now around 270 bps, well –off the high of around 338 bps a few months ago and helped the Italian stock market immensely on Monday. Italy’s MIB-40 plunged almost -12% in Q4-2018, while lost round -16% in 2018.

Italy 40 Chart Pivot: 19055 Support: 18875 18750 18625Resistance: 19125 19200 19385 Scenario 1: STRONG ABOVE 19055 AND SUSTAINING ABOVE 19125-19385, FTSE-100 MAY FURTHER SURGE TO 19600/19645/19680/19875 IN THE NEAR TERM Scenario 2: WEAK BELOW 19015 AND SUSTAINING BELOW 18875-18625, MIB-40 MAY FURTHER PLUNGE TO 18475/18700/18350/18040 IN THE NEAR TERM Comment: SHORT TERM RANGE: 16850-19680

UK 100

The UK’s FTSE-100 slips -0.39% to close around 6810.88 and made a session low-high of 6778.01-6874.11 in a day of moderate volatility. Britain was dragged by exporters/MNCs (higher GBPUSD), lingering Brexit uncertainty, Cigarette makers such as BAT, Imperial Brands were also under pressure on analysts’ downgrade, while helped by consumer stocks (upbeat guidance from retailer Dunelm). Energies supported initially (higher oil), Miners and materials helped as metals got a boost on Chinese stimulus optimism and some cut in targeted RR ratio. Overall, the UK’s FTSE-100 tumbled almost -11% in Q4-2018, while lost almost -12.5% in 2018.

UK 100 Chart Pivot: 6850 Support: 6785 6700 6670Resistance: 6920 6980 7050 Scenario 1: STRONG ABOVE 6850 AND SUSTAINING ABOVE 6920-7050, FTSE-100 MAY FURTHER SURGE TO 7110/7170/7230/7305/7350 IN THE NEAR TERM Scenario 2: WEAK BELOW 6825 AND SUSTAINING BELOW 6785-6670, FTSE-100 MAY FURTHER PLUNGE TO 6560/6480/6445/6365 IN THE NEAR TERM Comment: SHORT TERM RANGE: 6445-6920

GBP/USD

On the great Brexit saga, the EC reiterated that the UK Prime Minister Theresa's May's divorce deal would not be renegotiated even as a poll showed a record low 18% of British voters think the PM has got the right agreement. The EC said that the Brexit deal on the table is the only deal possible. The EU will continue to implement a no-deal contingency Brexit plan. And as Brexit negotiations are over, no further Brexit negotiations meeting is scheduled for the week.

Theresa May said on Sunday that Britain would be in uncharted territory if her deal is rejected by parliament this month, despite little sign that she has won over skeptical MPs. But Theresa May is trying her best to convince the Parliament and warned that the only alternative available is a no-deal Hard Brexit. Theresa May also assured more measures on Northern Ireland and a greater role for the UK Parliament on Brexit.

As per the report, Theresa May “may” hold the parliamentary vote on her Brexit deal on 15th Jan and May & Co is quite “hopeful” that the current Brexit deal will be eventually approved. Theresa May will table the Brexit deal to the Parliament on Monday for debate and discussions.

Although the UK transport ministry is trying its best to prepare for a no-deal Hard Brexit transportation of goods at Seaborne Freight, the UK opposition Labor Party accused that there is “mounting evidence of a lack of relevant expertise or experience” and termed the so-called due-diligence by the transport ministry as “incredible”. The Labor Party also accused the “sheer incompetence” of the government’s no-deal Brexit preparations as “extremely alarming”.

As per a report, the EU is considering ways to help UK Prime Minister Theresa May to secure support from the parliament for the Brexit agreement. The Irish backstop is the key issue in focus. It’s politically a solution to avoid a hard Irish border that is not intended to be triggered. Even if it’s triggered, the backstop would be temporary. However, legally, UK is not allowed to quit the backstop unilaterally. EU officials are said to be considering the reassurances needed. One resolution is a commitment by EU to have a UK-EU free trade agreement in place by the end of 2021. That would help avoid triggering the backstop.

Separately, there are also reports that the UK and EU officials are discussing the possibility of extending the Article 50 withdrawal notice if the Brexit deal cannot be approved by the parliament. But the UK PMO reiterated publicly t that “The PM has always said that we would be leaving the EU on 29 March 2019, and we would not extend Article 50.”

Overall, in the absence of any major unexpected concessions from the EU, which is very unlikely Theresa May “may” not go for the Parliament vote at all as it will be an inevitable loss. Thus Theresa May “may” be now planning to extend the Article-50 by another 1-year. Looking ahead, the probability of a “no-Brexit” could be higher rather than a no-deal hard Brexit and this will support the GBP.

Apart from politics, on economics, data on Friday showed that the UK service PMI for December surged to 51.2 from prior 50.4 sequentially, higher than the expectations of 50.7, indicating the UK economy may grow at just 0.1% in Q4. Markit noted “modest rises in business activity and new work while job creation eases to 29-month low and business confidence at second-lowest level since 2009″. The UK is basically a service-oriented economy as almost 80% of GDP output is generating from services, especially from banks & financials., but that’s too is now under stress on lingering Brexit uncertainty and UK/EU “political game of chickens”.

Markit said:

“The service sector typically plays a major role in driving economic growth but is now showing worrying signs of having lost steam amid intensifying Brexit anxiety. The final two months of 2018 saw the weakest back-to-back expansions of business activity since late-2012 and highlight how clarity on Brexit is needed urgently in order to prevent the economy sliding into contraction”.

“Combined with disappointing growth in the manufacturing and construction sectors, the meager service sector expansion recorded in December is indicative of the economy growing by just 0.1% in the closing quarter of 2018”.

“Although increased preparations for a potentially disruptive ‘no deal’ Brexit are helping to boost business activity in some cases, notably in manufacturing, heightened Brexit uncertainty is compounding a broader economic slowdown. Measured across all sectors, business optimism is down to the third-lowest since comparable data were first available in 2012”.

“Even the current slow growth of business activity is only being achieved by firms eating into back orders, suggesting that operating capacity could be reduced in coming months unless new order inflows pick up. Employment growth is already faltering as firms took a more cautious approach to hiring. Both manufacturing and services have seen previously solid hiring trends stall to near-stagnation, underscoring how the uncertainty faced by businesses will inevitably feed through to households as the job market deteriorates”.

On early Tuesday, GBP soared to a high of 1.2797 on comments by the Irish PM Varadkar, confirming the earlier report that the EU is willing to give written assurances on backstop ahead of the British Parliament vote and further said that the EU doesn’t want to trap the UK into anything.

But GBP soon slips from the session high as the UK Brexit secretary Barclay said the UK is not looking to extend the Brexit leave date of 29th March’2019 as there would be real difficulties with such extension. And the UK is committed to leaving on that day. Barclay, when asked if MPs have changed their minds, that some are open to changing their mind. Barclay confirmed the UK Parliament vote on May's Brexit deal is going ahead next week commented that some MPs are open to changing their mind on the deal.

Meanwhile, the former Brexit secretary Davis said “the Irish PM's promise of assurances on Irish backstop will not be enough. And the EU is testing the mettle of the British government but they will come back to negotiate at the last possible moment if the UK holds firm”. GBP slips more after Davis comments.

GBPUSD is currently trading around 1.12765 in the early EU session Tuesday, edged down almost -0.10% and so far made a session low-high of 1.2748-1.2796 on lingering Brexit uncertainty like a T-20 cricket match, which costs the British cable over 5.5% in 2018.

GBP/USD Chart Pivot: 1.2815 Support: 1.272 1.269 1.266 Resistance: 1.285 1.29 1.294 Scenario 1: STRONG ABOVE 1.28150 AND SUSTAINING ABOVE 1.28500-1.29400, GBPUSD MAY FURTHER RALLY TO 1.30050/1.30600/1.31100/1.31700 IN THE NEAR TERM Scenario 2: WEAK BELOW 1.280050 AND SUSTAINING BELOW 1.27200-1.26600, GBPUSD MAY FURTHER PLUNGE TO 1.26000/1.25700/1.24250/1.23700 IN THE NEAR TERM Comment: SHORT TERM RANGE: 1.24250-1.28150

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