Daily reviews

11.03.2019

Dollar remains attractive amid risk-off flows

news

Trump tried to talk down the greenback. His comments about the dollar's strength weighed on the USD initially, but it quickly rebounded. Meanwhile, Fed’s Rosengren suggested rate pause may last several meetings. Kashkari said wages show labor market still has slack, Williams noted that new normal of slow growth will keep central bank patient, while Powell said that no immediate policy responses needed to the country’s economy.

  • Trump tries to talk the dollar down but fails

  • Euro sours on dovish ECB

  • Weak NFP employment data scared investors

  • Oil market at a crossroads

  • Further progress in US-China trade talks needed

  • Gold struggles to stage a convincing recovery


Asian equities

Asian stocks were lower for the week due to lack of news from the US-China trade front, while mixed economic data added to investor concerns over the global economy. Asian markets took a strong beating on Friday against the backdrop of some tensions surrounding US-China trade talks and weak Chinese export data. The exports plunged 21% last month, the weakest monthly performance since February 2016 and much worse than economists expected. The report confirmed that the tariffs imposed last year by the trump administration are taking a toll. Moreover, the data suggests that the global demand is really cooling, which increases investor worries over the health of the global economy.

The regional equities also suffered from a dovish ECB meeting as Draghi said the economy was in a period of continued weakness and pervasive uncertainty. He also pushed out a planned rate hike and instead offered banks a new round of cheap loans, which added to concerns. Such developments are obviously pressing down on market confidence, which is seen in lower bond yields and equities.

US equities

US stocks rallied late in the session but closed lower on Friday, extending losses made over the week. The Dow fell over 2 percent on the week, the S&P lost 2.2 percent, while the Nasdaq retreated 2.5 percent. The dismal jobs report scared investors and increased the selling pressure on stocks that were depressed by the prevailing risk aversion. Investors refrained from further buying as they took a wait-and-see approach, expecting further signs of progress in the US-China trade negotiations.

By the way, markets will likely shrug off the weak employment figures as the impact of the US government shutdown and difficulties with the seasonal adjustment of data during the winter months explains much of this volatility in the payrolls numbers during the first two months of the year. In general, indicators suggest that conditions in the labor market remain positive, with average hourly earnings were up 0.4 percent on the month and 3.4 percent on the year.

Currencies

Traders were mainly bullish on the greenback during the week, primarily due to the prevailing risk aversion and weakness in other currencies. The US economic data was mixed, and the dollar reaction was quite short-lived. The positive ISM services and new home sales data lifted the currency, while weak updates on construction spending, Non-farm employment, and trade balance capped the bullish impetus. On the data front, new home sales hit a 7-month high, service sector rebounded. The trade deficit surged to 10-year high in December, and the consumer debt on credit-card borrowing rose. Fed’s Beige Book report found slight growth in many regions as government shutdown depressed activity. As for the key release on Friday, the job growth screeched to a near halt in February, with nonfarm payrolls up just 20,000 versus +180K expected. It was the worst month for job creation since September 2017. However, the weak numbers were offset by a decline in the unemployment rate to 3.8 percent from 3.9 percent. Moreover, wages grew 3.4 percent in the past year, the best annual gain since April 2009.

EURUSD was aggressively lower for the week, with the pair slipped below the 1.12 mark for the first time since June 2018. The euro found a bottom at 1.1176 and recovered marginally above the 1.12 figure, mainly due to a weaker dollar following a dismal jobs reports. As for the common currency itself, it continued to lose its appeal after a dovish ECB meeting. The central bank leaved rates unchanged in order to give a fresh round of monetary stimulus and shore up sagging economy. The decision came on the back of the slowest growth forecast for the euro zone since the start of the quantitative easing program four years ago. Draghi said the euro-zone economy will now expand only 1.1 per cent this year, a drop of 0.6 percentage point from forecasts just three months ago. The monetary authorities now expect the key interest rates to remain at their present levels at least through the end of this year. The ECB also said it intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase program for an extended period of time past the date when it starts raising the key ECB interest rates. The cautious and quite dovish comments by the regulator raised market concerns over the state of the region's economy and thus pressed the euro down. Down the road, EURUSD will likely remain vulnerable, though a better risk sentiment could cap the downside pressure on the common currency.

Commodities

Brent crude rose marginally on the week, with the prices struggled to get back above the $67 level. According to the EIA data, US crude oil stocks increased 7.1 million, to just above 450 million barrels. The result was higher than this time last year, but not as high as in 2017. This time, the official data matched the figures released by API a day earlier. Meanwhile, the number of active oil rigs fell sharply in the United States last week according to Baker Hughes. The number of active oil rigs fell by 9 to reach 834. The overall activity in the US shale fields remains high, with concerns over the record production levels continue to cap the bullish tone in prices, despite the bullish news that OPEC is cutting more production than had previously agreed to. On the other hand, the market continues to derive some support from the persistent hope for resolving the US-China trade dispute. By the way, a senior Chinese trade official called on Saturday for a compromise between the United States and China that could make a trade deal easier to reach this spring. The Trump administration meanwhile continues to press China to accept an agreement allowing the United States to unilaterally reimpose tariffs if it concludes that China has not gone through with structural changes to its economy. In the coming weeks, signs of further progress could help the prices to appreciate further, but investor concerns and the unstable risk sentiment will likely continue to keep a check on bulls. After a brief dip below the $64 figure, Brent finished the week above $65.50. In the short-term, the prices will likely continue bullish attempts around the $66 threshold.

Gold prices recovered marginally last week but struggled to stage a convincing comeback due to dollar demand. The prices reached January lows around $1,280 and since failed to regain the key $1,300 mark which remains in focus. The yellow metal gained over 1% on Friday as a weak US employment report sent the dollar lower and clouded the outlook for the global economy. Despite the dismal data, the greenback remains attractive, both as a safe-haven currency and as an interesting alternative to major rivals, even as the Fed took a pause on hiking rates. In a wider picture, the bullion is quite well positioned to move higher in the month to come. This is due to further slowdown in the global economy and the increasing uncertainty in economy, politics and geopolitics. Technically, the yellow metal needs to overcome the $1,300 level in the short term in order to avoid renewed pressure and falling to fresh lows below the $1,280 handle.