Yesterday brought yet another escalation in the trade war. This time, Trump was reportedly totally annoyed that the Europeans responded to his 25% steel and aluminium tariffs rather than backing down and slapped 200% tariffs on champagne, wine, and other alcoholic beverages from France and the EU.
LVMH, the owner of Moet & Chandon and Veuve Clicquot, slid 1.1%, while Remy Cointreau lost more than 4.5%. The CAC 40 fell 0.64%. In Germany, the clash between the new PM-to-be Merz and the Greens threatens a massive spending deal. But the Stoxx 600 index resists to a slide below its 50-DMA on hope that any positive news from the Gemran political front could re-boost sentiment along with declining nat gas prices on the expectation that a potential resolution to the Ukraine-Russia war could lead to restoration of gas flows to Europe and mark the end of a terrible energy crunch on the old continent.
Elsewhere in energy, crude oil was down yesterday on the back of the escalating trade war that deteriorates the demand outlook while OPEC+ is preparing to restore oil production from April. The growing gap between the demand and supply outlook hints that the market will be in a deeper supply surplus situation later this year – as suggested by the IEA. Note that the US is gently increasing its oil production on Trump’s ‘drill baby drill’ demands, as well. This morning, crude is boosted by news that the US tightened sanctions against Russia and Iran. Yet macro factors will certainly weigh heavier than the geopolitical-led moves. The worsening global trade outlook, higher supply from OPEC and the US could push the barrel of US crude toward the $45/50pb range in the H2.
Softer-than-expected US inflation under the shadow of rising inflation expectations.
Weak energy prices are having a desired easing effect on inflation. The US producer prices fell in February, both the core and the headline figures and for both monthly and yearly basis came below expectations. Alas, the sight of slowing factory-gate inflation couldn’t cheer investors up yesterday. The S&P500 extended losses to more than a 10% slide since the February peak and is now officially in the correction territory. Nasdaq 100 lost some 1.90%. Investors are more focused on rising inflation expectations driven by tariffs than on actual inflation data, as expectations tend to be self-fulfilling. A sharp slowdown in consumer spending could help contain these expectations and their impact on prices, but the latest data suggests otherwise. As a result, today’s Michigan consumer sentiment and inflation expectations update could trigger a stronger market reaction than the CPI and PPI prints. Any signs of further heating in inflation expectations may dampen risk appetite and overshadow the early optimism tied to hopes that U.S. politicians will reach a deal to avert a government shutdown.
In the FX, the US dollar has rebounded this week from oversold conditions that resulted from a sharp selloff since January, explained by rising worries of a sharp US slowdown and mounting bets of a possible US recession later this year. The EURUSD tested the 1.09 offers earlier this week but failed to extend the attempt to the 1.10 psychological mark, somehow laid back by overbought conditions. The EURUSD outlook remains positive on the back of converging growth expectations between the two continent but the euro bulls will likely watch the developments on the German political front before refreshing their push to and above the 1.10 mark.
