Geopolitics pull global equities sharply lower

Improved sentiment and hopes of averting a global trade war boosted equities at the start of the week with European bourses spending much of the day on higher ground. Despite a bright opening in the US with Wall Street seeing early gains of over 1.5%, increased geopolitical tensions with Russia ensured that volatility was alive and kicking.

Optimism over averting trade war initially boosts indices

Investors have turned increasingly more optimistic that a global trade war will be avoided. China and the US are conducting behind the scenes talks in an attempt to reach an agreement over the trade tariffs, which caused the US markets to experience the worst sell off in over two years.

Global tensions surrounding trade are expected to remain a central focus over the week as US Treasury Secretary Steve Mnuchin and China’s vice premier for economic policy Liu He meet.

Discussions over opening the Chinese market will top of the agenda from the US and so far China are showing willingness to play ball.

Mnuchin being cautiously hopeful that China’s tariffs can be avoided was enough to send Wall Street 500 points higher. The markets are starting to read this trade war set up through different eyes than last week, when investors were seriously spooked.

Risk was being put back on the table with equities higher, gold falling and safe haven currencies such as the yen also in the back foot.

Dollar lower as US to expel Russian diplomats

However, as one area of geopolitics shows signs of improvement another is deteriorating rapidly.

Geopolitical concerns over Russia have quickly moved to the top of the agenda, as the US will expel Russian diplomats in a coordinated action with Europe. Equities are once again on the decline and the dollar is taking a hammering, as it heads back towards 89.00 versus a basket of currencies.

Markets will now wait to see Russia’s reaction, no doubt a tit for tat response, which could escalate tensions further.

EUR/USD to $1.2450

The weaker dollar is being reflected in EUR/USD which has also received a boost from ECB Governing Council member Jen Weidmann, who reassured the market over a mid 2019 rate hike.

EUR/USD is up 07% targeting $1.2450, although the absence of any economic data is making any move difficult to follow though on. Resistance at $1.2480 could set the near term target.

Moving through the US session there are several speeches from Federal Reserve policy makers which could grab the attention of traders.

However, given last weeks rate rise and that the next Fed meeting is still a good distance away their impact could be limited.

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