WORLD MARKETS TUMBLE AS TRADE WAR NEARS ESCALATION
The world markets fell today as the US and China inched closer to a trade war. The Chinese Shanghai Composite Index fell to the lowest level since 2014, erasing the last traces of a recovery. The declining Chinese stock market at a time when US stocks are performing well will give Trump more ammunition to move on with the trade war. This weekend, the Wall Street Journal reported that Trump had instructed his aides to continue with the $200 billion Chinese tariffs. Chinese officials said that they will implement retaliatory measures. They have also said that they will scrap the proposed talks with the US.
In Europe, the Stoxx, Dax, and CAC dropped sharply as traders expressed their worries about a full-blown trade war between the two largest economies. The three dropped by 0.50%, 0.30%, and 0.35% respectively. The US futures too pointed to a lower open with the Dow and the S&P shedding 35 and 10 points respectively. In a tweet today, Trump threatened fresh new tariffs to countries that don’t cooperate with the United States.
The sterling jumped slightly against the US dollar ahead of a busy week for Brexit negotiations. This month, the currency has moved up against the dollar as hopes of a no-Brexit deal fade. In Brussels, leaders believe that a deal between the two parties will be reached soon. However, there are concerns that the deal passed between Theresa May’s government and Brussels will not receive parliamentary support in the UK. Already, key pro-Brexit leaders like Nigel Farage and Boris Johnson have complained about May’s chequers deal. The recent CoT report by the CFTC show that hedge funds have slashed their bearish bets on the sterling.
The euro fell sharply against the USD in the Asian session. In the European session, the currency rose slightly after the EU released the CPI data. The data showed that the CPI remained unchanged in August. The headline CPI number remained unchanged at an annualized rate of 2.0% in August. The core CPI too remained unchanged at an annualized rate of 1.0%. At the same time, a senior member of the ECB said that the bank should be clearer about what will happen when rates start going up. In an interview, Benoît Cœuré said that the bank should talk more about what it means by ‘through the summer of 2019’. The bank has said that it will consider raising interest rates through summer, which is a bit vague. Benoit is one of the officials running to replace Draghi.
A new support and resistance pattern is emerging on the EUR/USD pair as shown below. In the past week, the pair has traded between the 1.1522 and 1.1734 range. It is now trading at 1.1657, which is at the middle Bollinger Band. It is also above the support of 1.1522. It is also above the diagonal support shown below in red. There is a likelihood that the pair will move higher, potentially to the resistance level of 1.1734.
Sterling started moving up on August 16 when hopes of a Brexit deal started to emerge. Since then, the pair has moved from 1.2660 to a high of 1.3142. It is now trading at 1.3094, which is slightly below today’s high of 1.3142. The current price is along the 61.8% Fibonacci Retracement level. It is also slightly above the 21 and 42 EMA. As shown below, the pair appears to be forming a cup and handle pattern. This means that it could continue to move higher, potentially to 1.3300 resistance level.
The USD/JPY pair started a bullish rally on Friday 7 this month. The rally took the pair from a low of 110.38 and last Friday, it reached a high of 112.16. It is now trading slightly lower at 112.09. The current price is in line with the 21 and 42-day EMA. The pair’s upward momentum appears to have lost momentum as shown below. While the upward movements will continue, there is a likelihood that a downward movement will happen. If it does, it will test the 111.76 support level.