Tariffs no longer in the limelight (Daily analysis 26.07.2018)

An unexpected negotiation success of the EU representatives in Washington. The improvement of the global sentiment increases the zloty's valuation - the EUR/PLN rate falls below 4.29 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 1:45 p.m.: Statement following the ECB meeting.
• 2:30 p.m.: Press conference by Mario Draghi, President of the ECB.
• 2:30 p.m.: US orders for durable goods in June (estimates: 3.0% MOM, core index 0.5% MOM).
• 2:30: Initial jobless claims (estimates: 215 k).
• 2:30: Balance of US trade with foreign countries for June (estimates: -67 billion USD).

Warming up the EU-US relationship

Few would have expected such a positive conclusion from the meeting of the European Commission President, Jean-Claude Juncker, in the White House. In the afternoon, there were negative publications in the media that President Donald Trump, contrary to his advisers, was pressing for the introduction of customs duties on the import of all cars. In the afternoon, Trump wrote on Twitter that he would not show any weakness (in terms of trade). This did not foretell a positive conclusion to the negotiations.

However, the White House conference before the talks suggested a positive mood, and both sides repeated that they were not enemies but partners. This was confirmed by the next conference - late in the evening in the White House Rose Garden. Juncker and Trump confirmed the agreement while announcing an increase in imports of liquefied natural gas (LNG) and soybeans from the US to the EU.

In addition, there were declarations on the opening of negotiations on the abolition of customs and non-customs restrictions. Both sides have expressed their willingness to reform the World Trade Organisation (WTO). The agreement between Juncker and Trump was also "an unspoken kick" for China. The negotiating position of the Asian power seems to have fallen. Although the word 'China' was not used, Juncker and Trump agreed that there are too many illegal subsidies at the moment, that illegal commercial activities are being used and that there is a need to start the technology transfer.

It seems that Juncker may be the greater winner of this visit. He achieved his main goal, i.e. the absence of duties on car imports from the US, and the existing duties on aluminium and steel are to be abolished. Moreover, looking at the data from the US Energy Agency (EIA) and the US Department of Agriculture (USDA), it may be observed that the export of the aforementioned LNG and soybeans from the US to the EU has been steadily increasing in recent years. Moreover, as long as the negotiations are ongoing, neither party will impose additional duties.

Zloty takes advantage of current situation

This agreement brought positive effects on the markets. At the end of the US trading session, the main market indexes were gaining in value. The situation is repeated today in the case of the main European indexes. Although the fluctuation range was slightly widened, it was within the range observed in recent days: the main currency pair (EUR/USD) was trading around 1.17.

This improvement in global sentiment, together with the weak dollar, clearly favoured the zloty. It was gaining against to the most of the main currencies, and the euro even fell below 4.29 PLN, reaching its lowest level since June 18th.

ECB and Facebook take over today's market attention

Factors that supported the zloty may become a burden later in the day. Yesterday, after the US market closure, worse than expected Facebook data for Q2 this year was published. However, the information provided by the company's representatives in the conference with analysts was particularly unfavourable. As a result of higher expenditures, higher privacy requirements imposed by the EU and less favourable exchange rates, the company's revenue growth pace is expected to slow down significantly in the next two quarters. Moreover, in 2019 the pace of cost growth is to exceed the pace of revenue growth.

This combination of bad news led to a fall in the Facebook valuation, by up to 24% after the closing of the market. Moreover, if a similar (or even deeper) fall were to be seen this afternoon when the US market started, the fall in the main indexes may worsen the general sentiment in the market and have a negative impact on the zloty, which may start to lose part of profits gained over the last few days. Especially if the mood and the main indexes will depreciate on the Asian markets later on.

Today the European Central Bank's (ECB) decision on interest rates and the asset purchase program will also be announced. In both cases, any changes are not expected, but perhaps the ECB or Mario Draghi during the press conference will want to clarify the wording regarding leaving the interest rates unchanged at least until the end of summer 2019. Though at the moment it seems unlikely, suggestions about the possibility of an earlier increase in interest rates could ultimately be positive for the zloty (and, of course, for the euro).