Draghi Fan Club

The US President Donald Trump threatened China with more tariffs, yet again, wiping away the mild optimism that came after the announcement of delayed tariffs on some $300 billion Chinese goods a day earlier.

The S&P500 (-0.12%) and the Dow (-0.04%) closed in the negative territory for the third straight day, while Nasdaq gained 0.32%. Energy (+1.54%) and technology (+1.09%) stocks outperformed, but the utility stocks (-2.15%) dived on growing risks of a further weakness in global demand.

But stocks in Asia roared and the Australian dollar advanced the most among the G10 versus the greenback on confirmation that Trump and Xi will meet on June 29, at 11.30am local time in Osaka. It is important to note that the chances of a trade-deal remain low.

Trump also renewed pressure on Federal Reserve (Fed) Governor Jerome Powell, saying we should have Draghi instead of our Fed person in quite a disrespectful language. What Donald Trump wants is not the European Central Banks (ECB) Draghi of course, but its lower interest rates. In this respect, Mario Draghi, who has recently pledged to pull the Euro-area interest rates to even more negative territories, has apparently gained the admiration of Mr. Trump.

Speaking of that, investors continue piling into the European sovereign bond markets and the German 10-year yield fell to -0.33% this week, a fresh historical low, amid the expectations of additional asset purchases from the ECB and deeper negative rates in the coming months. It must be concluded that investors are also loving what they hear from Draghi; Trump is clearly not the only fan on the block.

Now, it is worth noting that the US economy has been doing well under the Fed persons lead. The US first quarter GDP growth is expected to be revised up to 3.2% at todays release, versus 3.1% printed a month earlier. The unemployment rate remains at a 50-year low - yes fifty. Meanwhile, the US stock markets are at all-time highs, with 10-year treasury yield a touch above the 2% level. Even under these circumstances, the Governor of Fed shows willingness to pursue an accommodative policy to make sure that the trade war between the US and China doesnt interfere with the economic growth. And the market prices in a 25-basis-point cut from the Fed in July, followed by one, or perhaps two more cuts in the coming months. Powell deserves a little mercy.

The US dollar index recovers from three-month lows. A strong GDP read could give a further boost to the US dollar bulls, while a softer-than-expected figure should cap the upside potential later in the session.

The single currency, on the other hand, remains well supported by the EZ sovereign inflows and a broadly brittle US dollar. Buyers were found near the 200-day moving average (1.1344) on Wednesday, keeping the euro upbeat although the GfK survey printed a deteriorating German consumer confidence in July and Italys deficit-to-GDP ratio rose 4.1% in the first quarter, faster than 2.1% printed earlier. Hence, Mr. Draghi has his own headaches.

Starting from today, a wave of inflation figures across the Eurozone countries could revive the ECBs concerns regarding the slowing consumer price growth. Further data could also suggest a lower economic confidence and a waning business climate in the Euro area, mainly due to negative vibes felt by the global trade worries and the Brexit uncertainties. Yet, the weak economic conditions are mostly priced in the euros value and the Eurozone consolidated data could hint at an improvement in core inflation from 0.8% y-o-y to 1.0% in June. Therefore, the single currency could focus on building a further positive trend against the greenback as we move forward.

Read the full LCG Report onhttps://www.lcg.com/int/analysis-education/market-reports/articles/draghi-s-fan-club/