Trade Optimism Trumps Weak European Economic Sentiment

Global markets bounced higher on Tuesday as optimism grows over a US – Sino trade deal. A strong Asian session spilled into Europe, although markets pared gains as Wall Street opened owing to increasing tech concerns.

US and China extending trade talks for another day has been interpreted as a positive sign by the markets. Whilst no reason was given for the extension, Trump’s tweet that the talks “were going very well” was sufficient to lift sentiment boosting appetite for riskier assets such as stocks, whilst safe haven gold declined.

With US and China working to resolve their issues, the Fed promising to remain flexible and the US economy firing on all cylinders it is easy to see why sentiment is on the up. Obviously, this is not the end of US – China trade tensions by a long shot, ad there will almost certainly be further bumps and twists along the way but for now the markets are happy with the slow steady progress which it perceives has been achieved.

Dax Higher Despite Dismal German Data
The Dax joined its European peers surging higher, despite some dismal data from Germany. German industrial production declined -4.7% month on month in November, significantly lower than the  -0.8% decline forecast. This comes hot on heels of downbeat German factory orders, which dropped by -4.3% in November, the latest signs that the eurozone economy is slowing as trade tensions sap momentum for the powerhouse of Europe.

Euro Drops As Economic Confidence Hits 2 Year Low
Whilst the Dax escaped relatively unscathed from the dismal German number, the euro wasn’t so fortunate. The euro was trading on the backfoot as more disappointing eurozone numbers came in. Eurozone economic sentiment index fell to the lowest level since early 2017. The December index printed at 107.3 as the eurozone economy ends 2018 on a very weak note, just as the ECB are withdrew policy support.

The weakness was widespread across sectors and is signalling a soft fourth quarter for the eurozone economy. GDP growth forecast of 1.7% for the 2019 is suddenly looking rather optimistic which raise doubts over whether the ECB will be able to hike interest rates as planned later this year. 
The euro was down 0.3% versus the dollar, however it has rebounded off 1.1425 and is moving cautiously higher. With key US data not being released owing to the US government shutdown, FOMC minutes released tomorrow could be the next focus. However, it is worth keeping in mind that the minutes could well now be out of date following Fed Powell’s more dovish comments on Friday.