Europe Strikes Back
According to the Financial Times, the European Union is preparing 300 billion dollars worth of retaliatory tariffs against the United States, should they go through with the tariff plan targeting European auto manufacturers. The proposed tariff is roughly equal in scale to US annual imports of cars and spare parts. Representatives of the auto industry warned that the additional taxes will cause US domestic car prices to rise by up to $6,000 and will result in a large number of jobs being lost. The European Commission claims the US’ one sided alteration of trade rules doesn’t just violate international law, it undermines the trust in international organizations and partnerships. EU President Jean-Claude Juncker will visit Washington on July 19 to attend a public hearing at the Department of Commerce and personally meet with President Trump to speak about these issues. Based on last week’s EU summit, it seems that the Union plans to take retaliatory action in response to every US protectionist measure.
Asian Stocks Trend Downwards
Despite Friday’s positive results, July’s first trading day was instead dominated by the bears. The Shanghai Composite reached new lows after a 2.5% drop in value. The Japanese and South Korean indices weren’t far behind either, both of them falling 2% each. The new American tariffs go into effect this week. As a result, investors decided to reduce their stock positions until the full extent of their political and economic consequences becomes clear.
Precious and industrial metals also suffered. Silver dropped by over 1%, copper and platinum were also in the negative. Platinum in particular fell by 1.5% today alone, reaching its lowest price since 2016. Its 2016 low was $826, which is dangerously close to today’s $845 price.
Light Sweet Crude Oil
Only a week after the OPEC meeting, Trump announced via twitter that he asked the Saudi King to increase oil production to 2 million barrels per day. According to the President’s tweet King Salman of Saudi Arabia promised to increase production. The President’s actions suggests that Washington plans to take a more active role in determining oil production alongside OPEC. Iran continues to be at the center of issues concerning oil production due to the sanctions penalizing them for their Middle Eastern activities. The US aims to involve the Saudi King as a means to compensate for the loss of 2-2.5 million barrels per day produced by Iran. Meanwhile, the Energy Information Administration reports that US oil exports are at an all time high. Iran on the other hand does not want to give up on their oil exports and is continuously searching for alternative solutions. The most obvious options seem to be China and the EU who seem willing to cooperate despite the US taking a firm stance against it. Under these circumstances the price of oil will remain volatile for the time being.
The sudden news of Saudi Arabia potentially expanding their production caused oil price to fall by $2 from last week’s peak price. The dip in price did not last long, since the bulls gained the upper hand during the European trading session, causing oil to move from $72.66 back to above $74. This is the third week in a row where the price of oil starts off with a downwards trend on Monday, only to recover over the following four days. These Monday price corrections were so far excellent opportunities for market entry, however it’s possible that the pattern may not repeat this week. Tomorrow’s weekly oil stock report by the American Petroleum Institute will be critical in trying to determine future price. Last week, inventories decreased by 9 million barrels, which exceeded the expected 2 million barrel drop and startled the markets. Perhaps the market had enough time to price in changes due to shifts in supply, meaning that fundamental events could become the primary drive behind changes in price instead.
USDCAD
On Sunday, the mutual tariffs between the US and Canada went into effect. Canada levied taxes on 12.6 million dollars worth of products in response to the US steel and aluminum tariffs. Historically the two countries enjoyed good trade relations that have been continually expanding under NAFTA for the last 20 years, however, this is now no longer the case. Canada’s Minister of Foreign Affairs Chrystia Freeland has stated that Canada will neither bend to US pressure, nor will they escalate the situation. She continued to say that going forward Canada will be working closely together with the European Union and Mexico against the US.
The uncertainty of the situation seems to favor the US component of the USDCAD currency pair, which shows signs of strengthening. After a one and a half month long sideways movement, the USD managed to climb up to 1.3380. This allows us to draw an upper trendline that will be help traders predict future levels of resistance. On the other hand, trends reversed near the latter parts of June when the Canadian dollar gained and strengthened by 250 pips. This movement lasted until it hit a strong support line at 1.3125 that previously acted as a peak price for the CAD. The chart suggests the rebound from this level can form the basis of a new upwards trend for the currency pair.
Sincerely,
Laszlo | Market Analyst
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