Daily summary: European markets soar on tariff optimism

• Markets in Europe post a second day of strong gains as China cuts tariffs
• Virus keeps spreading, more cases outside China
• EURUSD slumps to 2020 low on dismal data from Germany

Equity markets have decided to ignore virus risks and soared to all-time highs in the US, multiyear highs in Italy and close to ATH in Germany after China suddenly decided to unilaterally cut tariffs on US imports worth some $75billion. The move raised hopes that the US would return the favour, kick-starting growth in the global economy despite the virus spread. While these gains were somewhat in check for the US indices, Spain and Italy (SPA35, ITA40) surged by around 1%, more than erasing the impact of virus scare from the past week. The Chinese authorities suggested that the country would resume activity next week with the exception of the Hubei province. Nevertheless it’s safe to say the economy would not run on all cylinders and one could wonder if the tariff move isn’t a desperate move to stabilize things. So while the markets are complacent for now, this ignorance could backfire if the economic damage turns out to be significant.

After rejecting the resistance zone last week the ITA40 has just broken it and soared to the fresh post-crisis highs. Source: xStation5

The FX market was somewhat calmer but two things should catch our attention. First, EURUSD slid to a fresh 2020 low after a dismal report on industrial orders from Germany. The orders in December were the lowest in 4 years, negating improvement suggested by the PMI reports. In the EM sphere the Czech koruna was the hero of the day after the central bank raised rates to 2.25%. The gains were diluted later on as strong dollar pulled away some air from the EMs. The South African rand lost nearly the full percent versus the dollar.

Oil market failed to break higher despite a suggestion of additional 600kbd output cuts but gold looks very well supported. Gold and silver prices rose for the second straight day even as equity market sentiment was clearly positive.

Things are getting interesting as market euphoria seems to contradict the Chinese contrasts and investors will have to digest the NFP report tomorrow in those circumstances. After a very strong ADP, expectations are very high.