European stocks and the US-China uncertainty

European stocks and the US-China uncertainty

2019-11-28 • Updated

The trade truce (or a “phase one” of the trade deal) between the US and China does seem to be approaching. However, there is still a great amount of tension surging on the comments from either side. The recent one was a comment by the US president Trump on November 8. He stated that there had not been any agreement on a complete tariff rollback for the Chinese goods. In response to that, on November 11 a Beijing government source revealed China’s pessimistic view on reaching the trade deal. While on Wednesday the same week, the Hong-Kong situation added oil into the fire over China warning the US against meddling into the Chinese internal affairs.  

This constant bouncing back and forth creates an unhealthy environment in the global economy. A higher level of uncertainty normally leads to higher volatility, a decline or a stall in the markets. Especially for a stock market in Europe, where lower risk is appreciated like nowhere else. However, despite these predicaments, the European stocks have had an uptrend recently.

Indeed, the Stoxx 600 rose on November 19 to the level unseen since 2015. The level of 409 index points was reached during the day. All the market sectors gained strength with just a few exceptions. Apart from various positive corporate news, this may have been a response to the 90-day extension issued by Trump administration in relation to Huawei. This extension allows US companies to continue doing business with Huawei within this period.

However, there was no further confirmation for the positive new stance from either the American or the Chinese authorities. Hence, there was little evidence to support the European stock market’s optimism. Consequently, the day closed at a lower level of 406. While on Thursday the same week, the closing level of the market was further down at 402.

Nevertheless, the historical data shows that the European stock market has been consistently growing since 2009 in spite of all the turbulence on the way. The monthly, quarterly and yearly charts show similar rising trends. Therefore, the peak of 409 index points is a logical event on a larger observation scale. The latest comment from the Chinese side reveals a “cautious optimism” on reaching the trade deal with the US. This gives the investors a relatively solid ground to expect the European stock market to keep rising in the long-term and beat the 409 high in the future. If that happens, it should boost the demand for the euro as well. Consequently, the euro may rise against the related currencies.

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