Trade War Looms over the Markets

Daily Analysis - 07/03/2018

Anxious Traders Wait for Trump

Uncertainty over Trump leaves the markets on edge. The ECB monetary meeting on Thursday is among the most important events of the week as any comments from Mario Draghi can create a lot of opportunities for currency Traders.

Investors remain on edge over tariff debate

The aftermath of Trump’s announcement last week that the U.S. would impose new tariffs on aluminum and steel has brought clouds over investors’ sentiment. Even though U.S. equities closed higher on Tuesday, investors remained anxious over the proposed tariffs by President Donald Trump.

Increasing resistance to President Donald Trump’s proposed tariffs on metals encouraged risk appetite among investors pushing US stocks into the green as the market opened on Tuesday.

Yesterday, Bloomberg News reported that sources close to Trump were convinced Gary Cohn, Trumps’ chief economic advisor, would leave the administration in the case the tariffs proposed by the president were implemented.

Yesterdays’ choppy session finally ended in positive territory. The Dow Jones 30 ended 9.36 points higher at 24,884 after briefly falling as much as 166 points. At the beginning of the session, the Dow rose 120 points.

The S&P 500 rose 0.3% to 2,728 after falling as much as 0.4%. General Motors, a company that would be adversely affected by the tariffs, saw its shares rise 0.5%. The Nasdaq composite closed 0.6% higher at 7,372 mainly due to the rise of Netflix and Amazon.

Renewed confidence surrounding the South African economy

The South African economy, the second largest in Africa after Nigeria, looks prosperous as it has passed a great recession mainly caused by political instability in the country.

On Tuesday, the South African health of the economy showed signs of growth, following economic data releases that economic growth accelerated for the first time since 2013. Quarterly GDP growth during the fourth quarter of 2017 expanded by 3.1%, while the South African economy grew by 1.5% on an annualized basis.

Economists had forecasted the South African quarterly GDP would be 1.5%, where the actual reading positively surprised at 3.1%. While the South African economy still has some distance to go when it comes to realizing its potential, if economic announcements can maintain this type of momentum it will increase economic sentiment towards the South African economy.

The stronger than expected GDP reading could also reduce fears of another credit downgrade. After the release of the GDP announcement, the South African Rand (ZAR) gained 0.85% strength against the US Dollar and is trading near 15-month highs.

Eyeing the ECB monetary meeting

European Central Bank policymakers are going to meet on Thursday and market participants turn their focus on when the central bank will wind up its massive stimulus plan.

The ECB is not expected to change policy, but the Governing Council may discuss a change to pave the way for the end of quantitative easing.

According to economists, the ECB is likely to avoid any hawkish comments that can strengthen the common currency or euro area borrowing costs. That means any drop in the QE easing bias would probably be balanced by an overall cautious tone. Among others, the recent market turmoil, a strong euro, a slow inflation growth rate and political deadlock in Italy after weekend elections could encourage policymakers to adopt a cautious tone.

In January, ECB president Mario Draghi avoided the question of the strong euro by saying the bank did not target exchange rates, but he may be challenged on the currency again on Thursday as economic momentum stalls after a strong start to 2018. Any word of caution on the strong euro could spark a disaster of long positions in the markets where net long positions on euro are near record levels.

Finally, the ECB is also going to publish its economic forecasts with no significant changes regarding the inflation rate and economic growth. At the same time comments from ECB officials regarding the potential global trade war would be highly anticipated from investors.