Financial market research and analysis

US and China stepping back from the brink of a trade war has lifted sentiment, boosting equity indices, putting the FTSE on track for a fresh record high. Despite a lower close for the broader US markets on Friday, Asian equities have bounced and Europe points to a higher start, as Trump’s administration halts plans to impose trade tariffs on China, whilst China promises to significantly increase its purchase of US farm exports and energy. This is by no means the end of the matter, especially given the huge gap that remains between the two sides, as highlighted by the lack of any real detail in the announcement. However, this was the encouraging start to talks that traders were after.

US treasury yields remain elevated over 3%, keeping the dollar on higher ground, in a rally which looks set for an extension should Wednesday’s FOMC minutes confirm an increasingly hawkish Fed.  The dollar rallied to 5-month highs in the previous week as the expected path of rate hikes in 2019 steepened.

Commodities Struggle Under Stronger Dollar; Oil Higher Following Venezuelan Elections

After shedding over 2% over the previous week, gold is once again on the back foot, under the weight of the mightily dollar. The precious metal is trading just $3 short of its recent 4 month low. Iron ore was another noticeable casualty of recent dollar strength, which combined with softer Chinese data in April has seen Iron ore drop over 2% in early trade – a move which could impact UK miners on the open.  Meanwhile oil was on the rise following a sham of an election in Venezuela, which could open the doors to sanctions from the US aimed at the oil industry there; an industry which is already showing serious signs of collapse amid years of economic and political crisis.

Euro Declines As Concerns Over Italy’s New Government Grow

Fears over a slowing eurozone economy combined with concern over the Eurosceptic direction of the new Italian coalition government plus a stronger dollar sent the euro to a five-month nadir last week versus the buck. This was the fifth straight week of declines and a close below the crucial 55 week moving average suggesting more pain could be just around the corner for the common currency.

As the populist 5 Star Movement and the League agree on a Prime Minister, ending the 11-week political vacuum in Italy, markets are showing signs of unease. Outlines of the new governments’ spending plans, rejection of the European Union rules and the creation of a euro opt out mechanism paint a picture of headstrong and unpredictable government which is likely to limit any upside to the euro, at least until there further clarification on the new governments intentions.

Whilst the FTSE MIB dropped over 3% across the previous week, the weaker euro has been providing a boost for other eurozone equity indices such as the Dax. The Dax has rallied for the past 2 months with just one minor pull back on the way and the chart shows no more major resistance levels to overcome before targeting the record high of 13600. This under no circumstances means that the Dax will rise to this level, but it suggests that the bullish stance should be given the benefit of the doubt.

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