Daily reviews

04.02.2019

Fed turns dovish, Trump remains optimistic

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Global markets saw a busy and choppy week, with investor focus was on everything, from central banks and economy to trade wars and the ongoing corporate season.  The dollar was mostly weaker against the majors, sending gold prices to nine-month highs. Stocks traded higher in general, cheering positive corporate earnings, positive comments on US-China trade talks, and a dovish shift in FOMC’s tone. The US job market confirmed its strength but failed to lift the greenback as traders continue to digest a cautious Fed’s rhetoric. The euro rose amid a weaker dollar despite dismal economic data from the euro zone.

  • Trump hails "tremendous progress" in talks with China

  • Patient Powell knocks the dollar down

  •  Hot jobs report fails to encourage USD

  • Corporate earning cheer investors

  • Gold at 9-month highs

  • Oil prices struggle at the key resistance

Asian equities

The Asian markets were mixed and finished the week nearly unchanged. On the one hand, investors liked the upbeat outlook on further US-China relations as after two days of trade talks both sides highlighted a good progress. Trump mentioned that Beijing has agreed to buy more American soybeans. However, there are still some other contentious issues that are yet to be resolved before March 1, when the cease-fire is set to be lifted and Washington is expected to raise import taxes from 10% to 25% for $200 billion in Chinese goods if the two countries don’t strike a deal before this date. So this month is going to be the key period for more progress towards consensus over the key issues. Meanwhile, market participants were disappointed by another dismal report from China. The official manufacturing PMI for January was 49.5, showing that activity contracted for the second-straight month, which still points to a weakening Chinese economy and fuels investor concerns over the global growth in general. Meanwhile, South Korean exports shrank for the second straight month in January weighed by weaker prices for memory chips and petrochemicals.

As such, China A50 Index declined on Friday but closed the week higher, around end-October highs of 11,522. It was the sixth straight week of gains and a major monthly rally after a depressed December, when global markets suffered an aggressive decline amid rising global worries. Japan’s Nikkei 225 was marginally lower on the week despite the yen was unchanged. The index struggled in the 20,920 region that stands on the way to the 21,000 figure. Once above this level, Nikkei could stage a more decisive rebound down the road. Chinese markets to be closed from Feb 4-8th for Lunar New Year holiday. 

US equities

US markets staged a more robust dynamic. Fed signaled of patience over future rate changes, which boosted risk appetite along with decent quarterly results. Facebook reported adjusted fourth-quarter earnings of $2.38 per share and revenue of $16.9 billion, while investors expected the numbers at $2.19 per share on revenue of $16.4 billion correspondingly. The number of daily and monthly active users rose by 9% in both cases. After the release, the company’s shares rallied 12%. In January, Facebook soared 27% after a 26% dip in 2018.

Apple posted quarterly revenue of $84.3 billion, a decline of 5% from the year-ago quarter, while quarterly earnings per diluted share was $4.18, up 7.5%. Revenue from iPhone declined 15%, and total revenue from all other products and services grew 19 percent. The brightest spot was that services revenue reached an all-time high of $10.9 billion, up 19 percent over the prior year. On general, according to some estimates, based on the results from nearly half of the S&P 500 companies, fourth-quarter earnings are estimated to be up 15.5% from a year ago. The numbers are looking really good but investors seem to be worrying that the results could worsen in the coming quarters as the effect from lower taxes and other fiscal measures will continue to abate.  For the week, the Dow Jones Industrial Average rose 1.3%, the S&P 500 added 1.6%, and the Nasdaq Composite Index advanced by 1.4%.

Currencies

The dollar was hit by the FOMC meeting as the central bank dropped the hints of any further rate hike and hinted at adjusting the balance sheet policy. The monetary authorities
said they would be patient in assessing the outlook for monetary policy. This was enough to make investors start to price out further rate hikes this year and even to predict possible cuts in 2020. Against this backdrop, it was not surprising that the greenback turned much lower across the board despite some traders were ready for a ‘patient’ shift amid the previous signals from the Fed officials, speculations about the consequences from the US government shutdown, and the trade war.

Due to a major downside pressure on the buck, EURUSD managed to finish the week higher despite the dismal economic data from the euro zone. The GDP growth in the region was unchanged from Q3’s 0.2% increase quarter/quarter, staying at its lowest rate in four years. Moreover, Italian GDP data showed the country is now in a technical recession as the country’s GDP contracted by 0.2% quarter/quarter in Q4 after a 0.1% fall in Q3. And even a spectacular jobs market report failed to give the dollar a lift. The US economy added 304K jobs in January versus 170K expected. The unemployment rate ticked up to 4% from 3.9%, but it was due to the partial government shutdown. Meanwhile, average hourly earnings rose 0.1% over December and 3.2% over last year versus consensus estimates of a 0.3% and 3.2% increase. In fact, the report was not so strong as it may seem at first glance. First, there was a big downward revision to December’s new jobs. Second, considering the tightness of the labor market, wage growth is still weak and point to modest inflationary pressures.

EURUSD challenged the 1.15 barrier for the first time since January 11 but failed to make a clear break above this critical level and closed the week around 1.1460. For the month of January, the price was nearly unchanged. Such dynamics shows that the euro stays afloat mostly due to dollar weakness, while its regional issues are pushing the currency in the opposite direction. As such, further tone in the pair will further depend on the general USD sentiment and fresh signals from the euro zone economy, especially from Germany. By the way, the ECB's Weidman that German's GDP this year could be well below 1.5%, and the region's inflation projections could be too optimistic. And this suggests that the ECB monetary policy normalization may longer than previously estimated. So in the longer term, the common currency will hardly be able to receive a boost from the central bank, and the USD remains attractive in the context of rates.

Commodities   

Crude oil prices were trading in a mixed manner but manages to stage a weekly growth due to a rally on Friday. Brent rose to the levels just below the $63 figure that capped the upside potential in January. The market was lifted in part due to some progress in the US-China trade talks and amid expectations of the upcoming meeting between Trump and Xi to try to seal a comprehensive trade deal. The market was also underpinned by strong adherence to the OPEC-led supply cuts in January. On Friday, Brent received a boost from stronger-than-expected headline payrolls data and a solid ISM Manufacturing PMI. On the other hand, another weak manufacturing report from China raised demand concerns and weakened the positive effect from a dovish shift by the Fed. The announcement of US sanctions against Venezuela failed to impress traders who shrugged off supply disruption risks amid fears that the actual restrictions won’t be enough to cut global supplies sufficiently. In other news, according Baker Hughes, drillers cut 15 oil rigs in the week to February 1, bringing the total count down to 847, the lowest since May 2018. Such an aggressive decline implies a potential slowdown in domestic production activity, which could support the market further on if fresh EIA data points to a decline in inventories. Venezuela will stay in the headlines in the coming week, as well as the general sentiment in the global financial markets.

Gold posted a second straight weekly gain. The major boost for metals was from the Fed as the central bank caught markets off guard by putting plans for further rate hikes on hold. Gold slid on Friday after hitting a nine-month peak a day earlier as traders preferred to take profit partially following a strong US jobs reports. In general, the picture for the yellow metal remains positive but it doesn’t mean that the way north will be straightforward from here as the selling pressure on the dollar could weaken should the political issues in the US get resolved and the incoming economic data point to a still robust growth. Technically, the bullion needs to stay above the $1300 figure and make a clear break above the $1325 handle to confirm its bullish tone.

Next week is going to be less busy for investors, though a number of topics will remain in market focus, including US-China trade relations, signals from the global economy, comments from central banks (Bank of England’s Super Thursday), developments in geopolitics.