Financial market research and analysis

Wall Street had some encouraging headlines to digest overnight, such as Google’s beat on almost every metric, which quickly sent the Nasdaq to a fresh all-time high. However, there were also enough worrying headlines for the broader US market to close off the session highs and for European bourses to point to a lower start this morning.

The unnerving headlines centred around trade tensions, which are showing no signs of evaporating anytime soon. In fact, Trump declaring that “tariffs are the greatest” paints a picture of these levies becoming a permanent fixture to his administration. A point which was backed by a pledge of $12 billion in aid for US farmers hit by Chinese retaliatory trade tariffs; showing that Trump has no intention of removing pressure.

These updates come on the eve before the head of the EU Commission, Jean-Claude Juncker is due to join President Trump in Washington for trade talks. Up until now, trade tensions have focused on the unfolding US – Sino trade war. Today the focus will switch to the more worrying scenario of a US – EU trade war, which, under a worst-case scenario has the potential to spark a crisis, if not a full-blown recession.

The threat as it stands so far from Trump is a 20% tariff on all imported European autos. The EU, whilst not wanting to walk into a trade war, do however stand ready to impose tariffs on $300 billion of US imports should such a move be required.

Juncker Looking to de-escalate

Juncker is widely expected to try to de-escalate the current tensions between the EU and the US by focusing on areas of common ground. The EU will not want to travel down any line of discussion with Trump which could end in tariffs on its autos. Whilst Trump has been open about using tariffs to bring trading partners to the negotiating table, the stats are most certainly not in Trump’s favour as he has failed to conclude any significant trade negotiations so far, instead, he has faced significant resistance from trading partners.

Trump wants a free trade deal, or does he?

Even a last-minute tweet overnight by Trump, for a free trade deal between the EU and the US, is being eyed with scepticism from traders, particularly given that the last free trade deal that the US was in, Trump pulled out of (TPP) claiming it was a bad deal.

What to watch:

Nerves are being reflected in the euro which is trading lower versus the dollar as we head towards the ECB meeting. Any negative headlines stemming from the biggest risk event today, the Trump – Juncker trade discussion, could see the euro target $1.16. We would also expect demand for the Dax to drop, given its bias towards autos and industrials.

A positive outcome from this meeting could go some way to easing global sentiment. In this scenario, we would expect equities to rally, in addition to a strong relief rally in the euro.

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