Daily reviews

22.10.2019

Investors cheer progress on Brexit, trade deal but doubts remain

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Despite the US and China proceeded to the so-called “phase 1” agreement, doubts about China’s promise to purchase more US farm products made investors feel somehow uncomfortable.

  • Trade optimism partially fades amid some doubts in on the ‘phase 1’ agreement
  • China hopes to reach phased trade pact with U.S. as soon as possible
  • Dollar mostly lower amid weak US economic data and better risk sentiment
  • US retail sales dropped for the first time in seven months
  • Hopes for a Brexit deal fueled a rally in European currencies
  • Oil prices on the defensive for the second week in a row


Asian equities

Despite the US and China proceeded to the so-called “phase 1” agreement, doubts about China’s promise to purchase more US farm products made investors feel somehow uncomfortable. China also said it wants to hold more talks this month to hammer out the details of the “phase one” trade deal touted by Donald Trump before Xi Jinping agrees to sign it. At the same time, Beijing expressed hope for reaching a trade pact with the US as soon as possible.

On the data front, China’s import and export data for September came in worse than expected amid the country’s ongoing trade friction with the U.S. Exports fell 3.2% in September from a year ago, while imports dropped 8.5% during the same period. As a reminder, in August, China’s exports in U.S. dollars unexpectedly fell by 1% year-over-year — the biggest fall since June. Also, China’s economy grew at a slightly less-than-expected 6 per cent in the third quarter.

Against this backdrop, Asian stocks mostly tumbled towards the end of the week, with the Shanghai composite fell 1.32% to close at 2,938.14 on Friday. Over in Hong Kong, the Hang Seng index fell 0.72%. Australia’s S&P/ASX 200 slipped 0.52%. Over in Japan, the Nikkei 225 bucked the trend to add 0.18%, while South Korea’s Kospi slipped 0.83% to close at 2,060.69. Overall, MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.30%.


US equities

U.S. stocks finished the week on a downbeat note after flirting with all-time highs in the wake of positive earnings reports. By the way, Boeing accounted for about two-thirds of the decline in the Dow Jones Industrial Average, while lower technology stocks including Microsoft put the pressure on the Nasdaq Composite. Boeing shares declined after U.S. regulators said the company failed to turn over communications between its employees during the certification of the grounded 737 Max jet. Against this backdrop, Boeing dropped 6.8% — its biggest one-day drop since February 2016.

Meanwhile, Johnson & Johnson slid over 6% after the company recalled some baby powder upon finding traces of asbestos. Netflix shares dropped more than 6%. Facebook, meanwhile, slid 2.2% while Amazon fell 1.6%. Alphabet shares pulled back 0.4%. Despite Friday's decline, both the S&P 500 and the Dow managed to post solid gains for the week. The S&P 500 rose 0.5% week to date while the Nasdaq gained 0.4%.

Some optimism came from positive developments around Brexit. The U.K. and European Union struck a long-awaited draft Brexit deal. Meanwhile, Speaker John Bercow blocked a vote on the UK Prime Minister's Brexit deal on Monday. As such, the uncertainty on this front persists.


Currencies

The greenback staged a weak performance last week on a combination of positive developments in geopolitical arena and weak U.S. economic data. Risk sentiment was unstable in general, amid mixed signals from the economy and some doubts in on the ‘phase 1’ trade agreement between the U.S. and China. On the data front, Empire State index shows slightly better factory activity in October. A broad weakness in the dollar was seen on Wednesday, after unexpectedly weak US retail sales report, which is a bad sign for consumer economy. The retail sales dropped 0.3% - the figure dropped for the first time in seven months in September. Meanwhile, Data for August was revised up to show retail sales gaining 0.6% instead of 0.4% as previously reported.

Meanwhile, homebuilder confidence surged to highest level in nearly two years, thanks to lower mortgage rates. U.S. business inventories unchanged in August. Fed’s Beige Book report pointed to a ‘slight’ growth in some regions. Philly Fed manufacturing index stumbled in October, housing starts fell 9%, while industrial production fell back 0.4% in September after advancing 0.8% in August.

As for the Federal Reserve officials, Bullard noted that risks remain high and Fed is on a ‘meeting by meeting’ basis. Daly highlighted the importance of getting inflation to target. Evans highlighted that no more rate cuts are needed this year. Williams said the central bank will adjust response to money market volatility ‘as appropriate’, while Clarida reiterated that the Fed is not locked into a set interest rate path and Kaplan said he was ‘agnostic’ on need for rate cut in October.

Against this backdrop, the EURUSD pair has finally broken above the 1.10 handle and registered mid-August highs around 1.1170, having settled between the 100- and 200-DMAs. GBPUSD jumped to 1.30 on positive Brexit headlines, while USDJPY was nearly unchanged for the week after failed attempts to challenge the 109.00 resistance area.


Commodities

Crude oil prices fell for the week ending October 18 as bearish sentiment prevailed in the oil market, with the price of Brent crude oil for December delivery down 1.80%. Traders were still worried about trade uncertainties between the US and its trading partners which could lead to global economic downturn and lower oil demand. Besides, in its latest monthly oil market report, the International Energy Agency cut its headline oil demand growth number by 0.1 million barrels per day for both 2019 and 2020. Also, U.S. commercial crude oil inventories increased by 9.281 million barrels in the week ending October 11, more than the market expected growth of 2.8 million barrels. Weak economic data from major economies added to investors' concerns. As such, Brent failed to confirm a break above the $60 handle and slipped below $59, with the bearish bias persisted on Monday.