Market Wrap: Steel Tariffs and Wall Street drops, Christine Lagarde and EUR/USD holding 1.10

Shares in Europe are on course for a positive start with LCG pricing indicating a higher open on Wall Street. The dollar is up slightly after falling yesterday. Gold remains in a tight range while oil is rising for a second day.

Wall Street drops

Shares slumped on Monday in the biggest daily fall since Wall Street struck record highs last month. The US placing steel and aluminium tariffs on Argentina and Brazil caught markets off guard. Traders have had US-China trade tunnel vision. As Americans would say, this came out of left field. The new tariffs in South America are a reminder that with Trump as US President, a phase one trade deal with China doesn’t mean global trade just resets to the old status quo. Traders are buying the dip on Tuesday but there is a risk that markets have been placing too much emphasis on the trade deal, at the expense of ignoring other risks. The growing reticence from central banks, like the RBA overnight, to expand monetary stimulus is being ignored while the trade war takes centre stage.

Euro rebounds from 1.10 level again

A broad decline in the dollar after soft manufacturing data has pushed the euro to 2-week highs. A fourth monthly decline in US manufacturing was particularly disappointing in the wake of more upbeat data in China and parts of Europe. The rally in the euro yesterday was notable from a price action standpoint. It is the third time the 1.10 price handle has held off declines in EURUSD since breaking above it in early October. It’s a further indication that the euro is bottoming out after hitting 2-year lows in September this year.

New ECB President Christine Lagarde might be some of the reason the euro strengthened more than other currencies against the dollar. Traders are reading the tea leaves scattered by Lagarde in her first speech to the European parliament. Lagarde said she would be resolute on the ECB inflation mandate, seemingly indicating no plans to reduce the target rate from just under 2% to 1%. That’s dovish because the ECB isn’t meeting the target, and arguably needs more stimulus to reach it. On the other hand, the acknowledgement of the side-effects from the ECB’s ultra-accommodative policy is a notable shift from her predecessor Mario Draghi – who always minimised the negative effect on banks specifically. That is hawkish and another sign of the internal debate at the ECB about whether policy easing has hit a lower bound.

US opening calls

SP 500 to open 6 points higher at 3119

Dow Jones to open 44 points higher at 27,827