Where to start? There are a large number of talking points from yesterday and all touching on the key areas that have been dictating various market directions. The biggest news was NAFTA 2.0, or the USMCA as its now being called. A tri-party trade agreement between the US, Canada and Mexico finally agreed that is to the liking of all parties. This was hailed as a considerable victory, not necessarily for Trump and co but for markets that having been living in fear of trade wars and tariffs. Trump took aim at Europe and China in a speech yesterday for “treating the US unfairly” but at the end of the day the fact an agreement was made provides greater hope to global trade, which has experienced some slowdown in the face of recent headwinds. US stocks rallied to fresh highs and the US index is on a march higher as well, back to fresh two week highs and now up over 1.85% from last week’s pre FOMC levels. Another interesting point to note is that oil has traded to fresh 4.5 year highs as supply is expected to drop as Iranian sanctions are imposed.
The positive sentiment that prevailed through much of yesterday subsided overnight with Asian markets trading lower and European stocks opened in the red, stoked by fears of a global slowdown and concerns of a growing Italian crisis. On the first point the IMF’s Christine Lagarde said that “although it’s not quite raining, it’s starting to drizzle” as she revised down global growth forecasts, suggesting that the headwinds they warned about earlier in the year are starting to have an impact. Needless to say trade is part of that concern and there’s some way to go before all that gets sorted out. The shift to a risk off environment has seen an increased demand for safe haven assets and as such the USD and JPY have both found themselves supported this morning.
Italy now faces a different crisis. The European Commission president Jean-Clause Junker openly commented that the Italian budget plans risk throwing the country and the euro area into the kind of market turmoil sparked by Greece almost ten years ago. That is some warning and perhaps a bit dramatic at this point as it shows the levels of concern around Italy is rising considerably. This fear is being reflected in the bond market with Italian v German 10 year yield differentials, hitting over 300bps this morning. Needless to say the euro is also feeling the pain, the single currency has dropped over 2.4% from last week’s highs vs the USD, EURUSD now sitting around the 1.1525/30 support which was a strong level all through summer. The previous break below it saw a drop back towards 1.1300 and we could well be making our way back there again should the Italian concerns crow into a major crisis.
The pound found some support in trading yesterday as the UK suggested they would be willing to compromise on the Irish boarder in order to achieve a deal but any gain was short lived. Thus far it’s just hot air rhetoric and markets are responding less and less to this type of news flow, it’s usually good for a 20/30 pip run in GBP before markets quickly realise there is no substance behind it. This will continue to be the case until we see something concrete and favourable but as always it’s a very contentious issue and finding a solution to appease everyone will remain exceptionally difficult. GBPUSD has dropped back below 1.3000. 1.2890/1.2900 area is next support now should dollar demand continue, a bounce should see us back up to 1.3050 area.