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The European market (Stoxx-600) closed around 373.64 Tuesday, inched up almost +0.39% on Wall Street optimism amid hopes of Fed patience and flexibility coupled with some upbeat US economic data. But the market was also spooked by growing India-Pakistan geopolitical tensions and fading optimism about the US-China trade truce.
The export-heavy European market was also dragged by lower USD (-0.39%) and higher local currencies on hopes of a dovish Powell testimony and Brexit delay or no-Brexit at all. GBPUSD jumped almost +1.23%, EURUSD surged around +0.28%, while USDJPY tumbled around -0.45%. The market was also undercut be a deluge of guidance warning by various European corporates.
On early Monday, the risk-on sentiment was affected after India launched a major “air surgical strike” of 1000 kg laser-guided bombs on Pakistan’s JEM terror camps (Balakot), destroying those completely, and claimed to kill at least 300 terrorists in the process. This is in retaliation of the Pulwama (Kashmir) suicide attack on Indian CRPF convoy by alleged JEM terrorist 12-days ago, which killed almost 44 CRPF personnel and wounded many more.
After the Indian “surgical strike” report early Tuesday, there was some global “risk-off” sentiment, Yen inched up slightly and Dow/SPX future slumped, while India’s Nifty tumbled almost -1.5%. But Nifty eventually recovered to some extent on hopes of de-escalation after this “one & done surgical strike” ahead of the Indian election to boost Modi’s prospect for a landslide victory. But, the market is concerned as after all, this is a dangerous and delicate geopolitical situation between the two major nuclear neighbors and Trump is also concerned about it.
Again considering all the pros and cons, India may not like to escalate the “surgical strike” into a major conflict or a full-scale war until Pakistan retaliates seriously. Ahead of the general election, the Indian government now urges Pakistan government to dismantle the remaining terror camps of its own on its territory rather than actively supporting terrorism in any form. The purpose of the BJP/NDA led Indian government has been served through the latest “surgical strike” and it could help Modi for a big win in the coming election on nationalist sentiment across the nation, leaving aside some core economic and other issues.
Apart from India-Pakistan geopolitical tensions and any possible involvement of China in it in the future as Pakistan’s “all-weather ally”, the market is also focused on US-China trade war.
On late Monday, Trump suggests the US-China “Signing Summit”. The US President Trump raised the prospect that he could sign a new trade deal with his Chinese counterpart Xi, as both sides expressed optimism that substantial progress is being made toward ending the trade war between the world’s two biggest economies. Trump said: “It looks like they will be coming back quickly again. We are going to have a signing summit, which is even better. We are getting very very close”. However, Trump also promptly tempered the enthusiasm, saying that a deal “might not happen at all”.
On late Monday, before flying to Vietnam for his 2nd summit with North Korea’s Kim, Trump tweeted:
“Heading over to Vietnam for my meeting with Kim Jong Un. Looking forward to a very productive Summit!”
“China Trade Deal (and more) in advanced stages. The relationship between our two Countries is very strong. I have therefore agreed to delay U.S. tariff hikes. Let’s see what happens?”
“If a deal is made with China, our great American Farmers will be treated better than they have ever been treated before!”
Despite Trump’s optimism and eagerness to have a China trade deal (to avoid another Dow plunge), the market is slightly concerned about the lack of details and absence of any official statement by both sides. Trump also did not withdraw his China tariffs of 10% as earlier assumed. Probably, he will do that after the “successful” trade summit to end this pseudo trade war/skirmish.
British Airways owner IAG tumbled after MSCI deletion, while Fresnillo plunged on guidance warning for 2019 as a “challenging year”. Techs were underperformed after guidance warning by Apple supplier ACC Tech. Babcock slumped on guidance warning amid higher restructuring costs as a fall out of Brexit uncertainty, while Britain’s Metro bank plummeted on more fundraising amid growing stressed assets (NPA/NPL). PSA stumbled on profit booking after stellar rally following upbeat report card.
On the positive side, BASF jumped on upbeat earnings and guidance despite the gloomy market, while Travis Perkins zoomed on better-than-expected EBITDA/PBT (profit before tax). Ocado jumped on JV buzz after announcing talks to form a joint venture that would give M&S a full online food delivery service for the first time.
On early Wednesday, the Stoxx-600 tumbled almost -0.58% to a session low of 371.44 on worsening geopolitical tensions after Pakistan retaliated against India’s “surgical strike” by its own version of the air strike, while India also responded. The overall situation is now turning very serious like an all-out war and there is some global risk-aversion move. USDJPY slips, while GBPUSD and EURUSD also inched up on hopes of delayed smooth Brexit.
On Tuesday, Germany’s DAX-30 inched up +0.31% to close around 11540.79. Germany’s export savvy market was dragged by higher EUR but also helped by delayed and smoot Brexit optimism. Germany’s market was supported by chemicals (BASF), transportation & logistics (Deutsche post), financials (Wirecard), consumer & cyclical, while dragged by techs, foods & beverages, pharma & health care.
France’s CAC-40 edged up +0.13% to close around 5238.72. France was supported by financials, basic materials, and consumer goods, while dragged by techs, automobiles, and metals.
Italy’s FTSE MIB-40 inched up +0.11% on banks & financials after Fitch rating optimism.
The UK’s FTSE-100 tumbled -0.45% and dragged the overall European market on higher GBP, negative for exporters/MNCs. Also, guidance warning and subdued earnings by some British corporates undercut the market. But banks & financials helped on hopes of delayed soft Brexit, while homebuilders slumped on increasing regulatory hurdles and lingering Brexit uncertainty. Banks/other interest-sensitive stocks were also helped by the perception that BOE may cut in the event of no-deal hard Brexit to support the UK economy.
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