Over the weekend, The U.S. and China have agreed on putting a hold on the ‘trade war’ between the world’s biggest economies. This newly-declared economic truce will prove quite temporary if these two countries fail to deliver on the vague commitments to rebalance trade. The U.S. Treasury Secretary Steven Mnuchin said “We’re putting the trade war on hold. Right now, we have agreed to put the tariffs on hold while we execute the framework.”
This put quite the smile on European equity traders as risk-on sentiment flooded the market with the Dow Jones Futures opening in quite the gap higher on the news. Moreover, the Iran Nuclear Ordeal continues to grab attentions of everyone involved, especially with the EU fighting back against Donald Trump and the U.S. when it comes to this deal. The most significant measure announced Friday is a "blocking statute." It would protect European companies from US sanctions but could expose them to European penalties if they choose to cut ties with Iran.
This puts companies in quite the Catch-22. They would have a choice, either stop doing business with Iran to comply with U.S. law, but break EU rules. Or continue to do business with Iran, complying with EU rules, yet face harsh US sanctions.
Over in Asia, things don’t look all that better as the summit between the U.S. and North Korea is very close to being cancelled. The reason? Continued U.S. – South Korean Maritime drills in the Korean peninsula. North Korea went on the wire threating that the talks would not happen if these drills continued.
Italy’s New Populist Government
On March 4th, the 2018 Italian general election was held after the Italian Parliament was dissolved by President Sergio Mattarella. The result of this election was the rise of the populist regime in Italy. The Centre-right alliance, in which Matteo Salvini’s League emerged as the main political force while the anti-establishment Five Star Movement became the party with the largest number of votes. The end result was a hung parliament since no one won an outright majority.
After months of deliberation between the parties, the two parties have published joint policy proposals, calling for an end to austerity, increased tax cuts, a guaranteed basic income for the poor and increased deportation of migrants. This, of course, does not sit well with the EU as the ECB’s Nowotny says “Italy plans create a lot of nervousness.” After further deliberations between the two parties and the Italian President, a new Prime Minister has been agreed upon.
He is Conte, relatively unknown in the political world, and is a law professor at the University of Florence. He is Di Maio’s personal lawyer and the mastermind behind the anti-establishment party’s pledge to abolish more than 400 “useless laws” that it claims will cut bureaucracy and free up the economy.
Economic Calendar
As another week rolls in, it brings with it another set of economic data that shows how the economy of a country is fairing. This week is no different, tier-one data is dotted all over the week, with the majority of these data being geared towards the meeting minutes of the Central Banks’ last months policy decisions. These Minutes will clarify how the Central Banks looked at the economy and the reasoning behind their respective decisions. The minutes range from the British Inflation Report Hearings, the FOMC Meeting Minutes, and the ECB Monetary Policy Meeting Accounts.
That is not all, PMIs in Europe will also be making an appearance this week, as the French, German, and Eurozone Manufacturing and Services PMIs are released.
Market Movers
The EURUSD has lost all the gains it managed to make back in January and it seems that it is still on the same trajectory downward, with no sign of bottoming out. The 1.1710 is a pretty strong support for the pair as it tried reaching but bounced back up as of this writing. For the past couple of months, the pair has lost 6.67% of its value after dropping from the highs of 1.2555 back in February towards the current low of 1.1717. The probability that the pair is going to experience even more downside, is aggravated by the fact that the new Italian political regime will not be very helpful for the European union.
Within a month, the British Pound has lost 6.86% of its value from the highs of 1.4377 reached on April 17th, 2018. This fall can be attributed to a lot of factors from the continuing strength of the US dollar, to the uncertainty that is shrouding the Brexit situation. Since the pair has broken through all major Daily Moving Averages, i.e. 21-, 100- and 200-DMAs, investors will have to rely on previous levels to see where the pair might hold up. At the moment, it would seem that 1.3310 is the level to watch out for as there is a supportive zone that stretches all the way to 1.3290.