Daily reviews

25.03.2019

Dovish Fed, Brexit and US-China uncertainty weigh on investor sentiment

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As risk sentiment deteriorated closer to the end of the week, driven by a number of factors including the ongoing Brexit drama. May was forced to ask EU leaders to delay Brexit after the UK Parliament twice rejected the deal.

  • The never-ending Brexit drama unsettles GBP traders
  • Fed’s dovish message sent the USD down, stoke market fears
  • Trump-Xi meeting delayed, investors nervous
  • Oil prices retreat from fresh four-month highs
  • Gold gains due to dovish Fed, weaker dollar

Asian equities

The stocks felt uneasy in Asia last week amid conflicting signals from the Fed. On the one hand, investors received a relief as the central bank said it won’t hike rates this year. On Friday, the markets saw a roller-coaster session and closed little changed but declined in the weekly charts. the Shanghai composite rose slightly to about 3,104.15. Hong Kong's Hang Seng index closed about 0.14 percent higher at 29,113.36. Japan's Nikkei 225 closed slightly higher at 21,627.34. The Japanese nationwide core consumer price index rose 0.7 percent in February from a year earlier, falling short of a median market forecast for a 0.8 percent gain.

Judging by the market behavior, investors need some more time to fully digest the and interpret the recent change in Fed positioning. Market participants will also continue to follow further developments with regard to trade and geo-political factors, including US-China trade relations and Brexit.

By the way, on Monday, March 25, Asian stocks took cues from the US markets and fell across the board, with Nikkei 225 fell 3% in a wide selloff amid another wave of concerns over the global economy. Bond yields also continued to fall across the world with Australian 10-year treasury yields falling to a record low on Monday of 1.756%.

US equities

US stocks declined sharply on Friday and finished the week lower after dismal PMI data from major economies. The Dow fell 1.3 percent, the S&P dropped 1.9 percent on the day and 0.8 percent on the week, and the Nasdaq fell 0.6 percent on the week. According to the preliminary estimates, The IHS Markit US Manufacturing PMI fell to 52.5 in March of 2019 from 53 in February and below market expectations of 53.6 –the lowest expansion in factory activity since June of 2017 amid softer rises in output, new orders and employment. New orders increased at the weakest rate for just under two years in March, while growth of input buying was the slowest since May 2017. The report added to investor worries over the outlook for the US economy after the Fed’s dovish meeting.

In other news, China’s commerce ministry announced that Lighthizer and Mnuchin would be travelling to the country later this month for further trade negotiations. Over the weekend, Beijing committed to achieving a more even balance of trade and said that it will also continue to improve access to its markets, allow more foreign ownership. Signs of positive developments on this front could give a lift to risky assets in the days to come.

Currencies

As risk sentiment deteriorated closer to the end of the week, driven by a number of factors including the ongoing Brexit drama. May was forced to ask EU leaders to delay Brexit after the UK Parliament twice rejected the deal. The prime-minister had hoped to persuade the EU to delay the 29 March Brexit date to 30 June. Instead the European leaders offered her two dates – a delay until 22 May if MPs approve her withdrawal deal in a vote next week, or a shorter delay until 12 April if they reject it. By that time the UK must set out its next steps - either another extension or leaving without a deal. The EU says a further extension beyond 12 April is only possible if the UK agrees to hold European elections on 23 May. In turn, Theresa May has said London will not take part in the vote.

Meanwhile, a potential snag in the US-China trade negotiations added to investor concern as Trump-Xi meeting was postponed. Moreover, fears of a global growth slowdown increased after the latest Eurozone data. In particular, the manufacturing and services survey data signaled a high probability that the first and second economic data may disappoint. Businesses across the euro zone performed much worse than expected in March as factory activity contracted at the fastest pace in nearly six years, hurt by a big drop in demand. IHS Markit's Flash Composite Purchasing Managers' Index dropped to 51.3 this month from a final February reading of 51.9 versus 52.0 expected. The flash manufacturing PMI sank to 47.6 from February's 49.3, its lowest reading since April 2013. As a result, EURUSD which registered an early-February high around 1.1450 earlier in the week, had to retreat below the 1.13 figure, around which it finished on Friday.

After a dismal week, the pound gained on Friday and extended gains during the US session despite the rally of the greenback amid risk aversion. The pair printed a fresh daily high above 1.32. The move was driven by Brexit news – the Irish PM said there won't be further extensions for the UK. This week, PM May is expected to bring again her deal for a vote in the Parliament. Now, the future of PM May is in question as some ministers ask her to step down in return from supporting the Brexit deal. Meanwhile, hundreds of thousands of people have poured onto the streets of central London asking to have a final say on Britain's departure from the European Union. The ongoing uncertainty sent the cable lower on Monday, with the pair tumbled back below the 1.32 figure and has settled around 1.3160.

Commodities

Crude oil prices extended gains to fresh four-month highs around $68.50 last week but turned negative in the second half and finished around $66.65 after a brief dip below the $66 support. Brent crude oil for May delivery down 0.19 percent. Earlier in the week, oil prices rose as OPEC and its allies signaled that it would be possible to extend the supply reduction deal of 1.2 million barrels per day, which is set to expire in June. On Wednesday, Brent gained after EIA posted a sharp decline in crude oil stockpiles. In the week ending March 15, U.S. commercial crude oil inventories decreased by 9.6 million barrels from the previous week. Then, the increased risk aversion that fueled dollar demand, coupled with profit-taking send the prices lower from the local peaks as dismal manufacturing data of the US and Germany fueled further concerns over a slowdown in global economy and demand for crude oil. Further on, oil prices will continue to follow developments in the global financial markets and could extend the bearish correction but the downside potential remains limited for now as the general sentiment in the crude oil markets remains fairly positive for now.

Gold prices were mostly driven by the dollar moves. The yellow metal gained last week and extended the recovery to $1,320 though finished off highs. The FOMC meeting fueled demand for the bullion as the dollar turned sour after the Federal Reserve expressed a very dovish tone in its fresh economic projection for the US economy. The main takeaway from the March meeting was the revision of the median expectation of the number of rates hikes this year to zero. Moreover, the regulator acknowledged the creeping risks to global economic growth that may be posed by slowdowns in China and Europe, which brought strong selling pressure into the greenback, driving gold prices higher as a result. However, the general picture shows that the immediate market reaction to the headline that the Fed sees no rate hikes this year was overdone, and despite the precious metal looks relatively steady, the upside potential still looks limited as the greenback has already digested the Fed’s more dovish message.