First Light News: ECB Holds Ground; US-EU Trade Deal Eyed

With the VIX remaining south of 20.00, the S&P 500 added 0.1% and notched up its fourth consecutive all-time high. The Nasdaq 100 rose 0.3% and also pencilled in a fresh record high, while the Dow Jones Industrial Average retreated, trimming its recent upside and handing back 0.7%.

Heading into the European session, equity index futures suggest a modestly negative cash open, while US equity index futures trade on the front foot.

The European Central Bank (ECB) claimed a portion of the spotlight yesterday, and ‘unanimously’ decided to leave all three benchmark rates on hold. No surprises there, with the central bank largely echoing a wait-and-see approach. As I expressed in a recent post, the bar for the ECB to cut rates at yesterday’s meeting was high, given that the deposit rate had already been lowered 200 basis points (bps) since last year. Investors pared back rate-cut bets following yesterday’s announcement, demonstrating uncertainty surrounding future policy easing this year, with 15 bps worth of cuts expected by year-end.

The accompanying rate statement expressed a relatively optimistic viewpoint, underscoring the economy’s resilience, with inflation currently at the 2.0% medium-term target and domestic price pressures, including wage growth, continuing to ease. The statement, however, highlighted uncertainty and repeated that it is not ‘pre-committing to a particular rate path’.

ECB President Christine Lagarde reaffirmed an ‘exceptionally uncertain’ global environment, and commented that the sooner the trade uncertainty is resolved, the better. Lagarde was asked regarding the strength of the euro (EUR) nearing the US$1.20 threshold relating to inflation – a stronger currency, of course, makes exports (imports) more expensive (cheaper). She responded by noting that the central bank ‘does not target any exchange rate’, adding that the EUR is monitored for inflation forecasts.

In Other Markets

The US dollar (USD) snapped a four-day losing streak yesterday, adding 0.3% and forming a textbook bullish engulfing pattern on the daily timeframe. I believe the buck caught a bid amid better-than-expected US job claims data – both initial filings and continuing claims declined. Couple this with US President Donald Trump’s meeting with US Fed Chair Jerome Powell at the main US Federal Reserve building, where Trump, once again, called for Powell to lower rates, saying ‘it is about rates, not renovation’. Check out the video available on Bloomberg Television of this 3-minute clash – it was largely a pressure game, I felt; we can clearly see that the Trump-Powell saga is far from over.

In the bond market, US Treasury yields bear flattened once again yesterday, with shorter-dated maturities rising, while the longer-end of the curve ended largely flat. Meanwhile, in the Crypto space, there are losses across major markets this morning, with Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP) down 2.9%, 3.3%, and 2.9%, respectively, versus the USD.

US-EU Trade Negotiations Front and Centre

On the trade front, all eyes remain on the possibility of a deal between the EU and the US, now just a week away from the 1 August deadline. The baseline tariff is now 15%, following a trade deal recently struck between the US and Japan. As the 1 August deadline looms ever nearer, the US-EU trade negotiations have understandably been underway.

While I feel it will be unlikely to result in an all-out trade war, EU member countries have demonstrated broad support for retaliatory tariffs in the event of a no-deal scenario, totalling nearly €100 billion, or 30% levies on US imports into Europe.

Across the Atlantic, the UK and India pencilled in a free trade deal, which was conveniently agreed at the same time the UK and India faced off in cricket! India’s Prime Minister Narendra Modi spoke to reporters shortly after putting pen to paper and said: ‘There may be a swing and a miss at times, but we always play with a straight bat’. PM Modi also noted that he was optimistic regarding trade negotiations with the US. In terms of UK data this morning, June retail rose at a slower pace than expected at 0.9% (consensus: 1.2%), though it was notably higher than May’s reading of a 2.7% fall.

Following the UK retail sales print earlier this morning, additional macro prints to have noted today features the July German IFO business climate survey will be out at 8:00 am GMT – forecast to tick higher to 89.0 from 88.4 – followed by June durable goods orders numbers at 12:30 pm, forecast to print a fall of 10.8% from a 16.4% gain in May.

Written by FP Markets Chief Market Analyst Aaron Hill