All eyes on ECB meeting
By Arnaud Masset
Now that Trump and Juncker are friends again, as they pledge to deescalate the trade crisis, the spotlight will inevitably fall on today's ECB meeting. Even though the agreement triggered a relief rally in the equity market, the lack of reaction in the FX market suggests that the EU-US dispute was not the biggest worry. China remains the main target.
The last batch of PMIs for the euro zone, together with the Trump-Juncker "cease-fire" agreement, means that Mario Draghi will likely feel relaxed going into today's meeting. Nevertheless, we do not expect a ground breaking announcement as Draghi already set out his plan in the June meeting. Therefore, attention will focus on the council's view of the economic outlook as well as inflation developments. Since the June meeting, investors have reviewed their expectations to the downside and do not expect the ECB to hike interest rate before at least summer 2019.
The single currency appreciated yesterday evening with EUR/USD climbing 0.60% to reach 1.1740. Since then, the pair have been erasing gains slowly as investors prefer to remain cautious. Historically, Draghi's speeches have never been euro positive. There is no reason for that to change today.
Trade war with the US eases
By Vincent-Frédéric Mivelaz
US equities expressed relief at the news that the US and the EU are holding off from implementing new tariffs and will start negotiations. Both parties confirmed their willingness to reduce tariffs, while European Commission President Jean-Claude Juncker pledged to increase imports of US natural gas and soybeans (which are subject to a 25% tax by China). In return, the US would reassess the duties it imposed on EU steel and aluminum. As a reminder, steel and aluminum tariffs were imposed on China on 23 March and on the EU, Mexico and Canada on 1 June.
Overnight, US equities headed higher. The DJIA rose by +0.68%, while the S&P500 and Nasdaq increased by +0.91% and +1.17% respectively. The Nasdaq-100 Technology Sector Index is approaching its historical high of 4496.59 (12/03/2018), currently standing at 4414.50. European markets are recovering from yesterday's loss, led by the DAX +1.40%, Euro Stoxx 50 +0.65%, CAC40 +0.65% and SMI +1.10%, while the FTSE 100 is neutral, thus suggesting a good market session for the day.
Despite the current sentiment of relief in the marketplace, we remain skeptical that the trend will sustain. Indeed, Trump remains tough on China and no agreement has been signed with the EU. The move could also be a political manoeuvre to maintain strong ties with his supporters in the run up to November's US midterm elections and to keep his head above water – as resistance is coming from public opinion and within the Republican Party.
After showing some strength in yesterday's late session, the USD is currently trading sideways against major currencies. Today's loss against JPY (-0.25%) is expected to reverse afternoon. The pair are currently trading at 110.70 and heading towards 111.