Stock market indices in Europe are falling slightly today due to fears of a tariff war between the US and Europe. Washington has maintained a 15% duty on Airbus planes and a 25% tariffs on certain foodstuffs. Uncertainty is causing constant waiting for the relief package in the United States.
The German DAX index is falling by 0.32% in the morning and the British FTSE 100 by 0.84%. In the United States, we also see decreases in the three main indices. The session was different in Asia, where the Japanese Nikkei 225 index rose to its highest level in six months. The increases were dominated by the shares of electronics companies, and optimism was also added by data indicating that producer prices fell less than expected, which may show a recovery in domestic and global demand.
In the currency market, the dollar seems to be losing ground due to two main factors. The first is the lack of progress in the negotiations on the new coronavirus-related relief package. President Donald Trump accused the Democrats of being unwilling to negotiate, and the politicians themselves blame each other for failing to start negotiations and work out a compromise on key issues such as unemployment benefits and state aid for individual states.
The second reason for the dollar hitting may be the faster-than-expected inflation rise in the United States. Yesterday's data showed that core inflation increased by 1.6%, and inflation expectations have already returned to pre-pandemic levels. As a result, real interest rates on US dollar assets have fallen, which may adversely affect the perception of the dollar. We are talking, among others, about the real interest rate on U.S. Treasury bonds, which is over -1 percent.
In the absence of interest rate rises and inflation growth, we will come to an interesting moment, when an increase in price levels, instead of generating potential strengthening of the currency, may cause its weakening. At this point in time, there are no plans for any central bank to raise interest rates even in response to inflation growth. Hence, the struggle may begin for who will have the least negative real interest rates and capital may start to flow in this direction.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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