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Hot war leaves investors cold. Europe to open mixed

Investors are weighing up the erratic geopolitical backdrop with high hopes for earnings growth. Laying beneath the uncertainty is the question of of how much support can be expected by central banks if it all goes pear-shaped. That’s left European markets setting up for a mixed open inside a volatile sideways price range. Investors need some good results from US banks which unofficially kick off US earnings season on Friday to restore some confidence. As it happens, financial shares led the declines on Wednesday amid risks of a trade war.

 

Fed minutes were released after the close of European equity markets. The dollar popped after minutes revealed that all members of the FOMC see higher US economic growth and inflation and thus a need for more rate hikes. There was an acknowledgement that a trade war poses downside risks but for the moment the Fed looks like it plans to stick to its timetable on rate hikes this year.

 

Investor hopes of avoiding punitive tariffs have again been dashed on both sides of the Pacific.

Economic advisor to the White House Larry Kudlow saying that tariffs may come before negotiations with China means international companies may have to face the rough before the smooth. For their part, Bejing officals have said that President Xi’s speech wasn’t a concession to the US.

 

The chance of hot war in Syria with opposing sides backed by the US and Russia has understandably left investors cold. Wall Street closed lower with the Dow losing over 200 points as investors moved into government bonds as a haven. The increased liklihood of supply disteruptions during any missile strike saw the price of oil reach its highest since November 2014. Both Brent and WTI crude contracts have breached significant resistance levels, indicating a new breakout trend could be emerging.

 

The only saving grace was that Trump’s tweets saw no follow through to military action. But presumably that is coming. A worry is that the tone of Trump’s message makes troops on the ground a possibility. From a cold-blooded economics perspective, spending on war is good for short-term GDP growth. Payback comes down the road via unsustainable national debt - probably with higher interest rate payments.



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