It seems that trade tensions between the United States and China could be easing off. According to multiple reports, China is considering lowering tariffs on some US imports. European central banks are preparing ground to start decreasing interest rates even more. This political move undermines their economies just as uncertain inflation outlooks have begun to take hold.
The US inflation outlook remains highly uncertain. At the same time, Europe is being helped by declining energy prices and a stronger dollar, putting them in a much rosier scenario. As a result of the recently weakened US dollar, the euro has risen sharply over the past year. This major shift illustrates the contrasting economic landscapes in both regions.
Federal Reserve officials, including Christopher Waller and Beth Hammack, have expressed readiness to support rate cuts should employment levels be affected or if there are clear indicators of a downturn in the US economy. The change in mood is pushing the US 2-year yield lower. As of this writing, it has now dipped below 3.80%, a stunning comeback considering it was just over 4.40% at the beginning of the year.
All of this is leading to increased optimism with global markets. The FTSE 100 is dominated by energy and commodity-rich stocks. The more trade barriers drop, the more we should see investors flocking to these stocks. Improving U.S.-China tensions have led to a rebound in global equities, putting further wind at the market’s back.
With Alphabet’s shares up, they may have enough momentum to break through the key 38.2% Fibonacci retracement level from this year’s drop. Investors should watch this potential movement very closely. This possible increase is part of a larger movement in financial markets as investors respond to global developments.
In Europe, central banks have peculiar challenges of their own. On the European inflation outlook it looks noticeably softer, mainly due to declining energy cost and the strengthening of the US dollar. Such factors will certainly weigh on monetary policy decisions and importantly, considerations for government spending among European nations.
Indeed, European governments are already planning to increase spending on security and infrastructure security. This would exacerbate inflationary increases in targeted industries. Increasing trade tensions risk stalling Europe’s budding economic expansion. A lot of European economies rely on predictable international supply chains to continue prospering.
The Stoxx 600 index shows just how complicated these issues are, bordering on 60% of its sales coming from foreign markets. So as these companies repatriate profits back to their home euro zone, more dramatic impacts on currency exchange rates will be felt directly on their earnings.
Even amid a widely bleak international economic forecast, some key commodities are experiencing price surges. Copper futures have surged in recent weeks, giving a lift to firms like Fresnillo and Antofagasta. Copper prices are surging, driven by bullish sentiment for industrial metals on restarting economies. Simultaneously, investors are more bullish on the state of the market.