Daily reviews

01.04.2019

Investors monitor developments in the bond markets, US-China trade talks

news

U.S. President Donald Trump said on Friday that trade talks with China were going very well, but cautioned that he would not accept anything less than a «great deal» after top U.S. and Chinese trade officials wrapped up two days of negotiations in Beijing.

  • Fourth-quarter US GDP rose 2.2 percent, in line with expectations
  • Dollar rallies against major counterparts
  • US and China report progress in trade talks
  • Stocks recover in line with bond yields
  • Oil rises marginally on trade hopes
  • Gold plunges on stronger USD and month-end flows

Asian equities

Asian stocks appreciated on Friday after a mixed tone earlier in the week, amid hopes that Washington and Beijing are making progress in trade talks. Global bond yields continued to recover after a significant slide on worries about the economic outlook. The Shanghai Composite Index climbed more than 3.0 percent on Friday.

U.S. President Donald Trump said on Friday that trade talks with China were going very well, but cautioned that he would not accept anything less than a «great deal» after top U.S. and Chinese trade officials wrapped up two days of negotiations in Beijing. Both sides reported progress in the talks and China also approved majority-owned brokerage joint ventures for U.S. bank JP Morgan Chase and Japan’s Nomura. Earlier, the White House said the two sides «continued to make progress during candid and constructive discussions on the negotiations and important next steps». However, the officials did not elaborate on the nature of the progress. The talks are set to resume this week in Washington with a Chinese delegation led by Vice Premier Liu He.

US equities

U.S. stocks finished their best quarter in nearly a decade on Friday. The S&P 500 closed the day up 0.7% and up 13.1% for the first quarter of 2019. It marked the strongest quarter for the benchmark stock index since the third-quarter of 2019. The Dow Jones Industrial Average, meanwhile, rose 11.2% in the first quarter, while the Nasdaq gained 16.5%. The rebound later in the week came with a turnaround in Treasury yields. 10s had been as low as 2.134% but have bounced to 2.195%. US-China progress also played into stocks’ hands as well as the US GDP numbers that showed some bright spots. However, the bond market is set to remain under close scrutiny amid concerns over global economic growth and could yet bring back fears in the stock markets.

Currencies

The euro was bearish against the dollar during the week mainly due to dismal economic signals. After positive German Ifo survey (the index rose to 99.6 versus 98.5 forecast), Gfk consumer survey data showed that economic sentiment in Germany could fall in April, while euro-area sentiment dropped for a ninth month. Geman inflation slowed in Macrh, dropping further below the ECB goal. Eurostat sentiment data signaled that confidence is waning in the region as business climate declined to 0.53 versus 0.69 in the previous month, and industrial sentiment was at -1.7 versus -0.4 earlier. Then, the ECB officials expressed concerns about the economic look, while German 10-yr bund yields fell this week to negative for the first time since 2016, which added to the selling pressure on the common currency. There were also bearish comments from Draghi who said the central bank is ready to act and could delay a rate hike again. AS a result, from a weekly high above 1.13, registered on Monday, the EURUSD pair dropped to three-week lows marginally above the 1.12 figure which now acts as the immediate support area. Further negative pressure could send the prices to 2019 lows around 1.1175.

The pound was also lower on the week and was one of the biggest weekly losers as the U.K. government and lawmakers fail to pass a Brexit deal once again. Sterling tried to appreciate after Theresa May said she was prepared to leave her job earlier than she intended in order to secure a smooth and orderly Brexit. But the DUP and ERG announced that they still would not back her Brexit deal after her resignation offer, which prompted further sell-off in the cable. On Friday, the Brexit deal was rejected once again by U.K. lawmakers as expected, which increased uncertainty among traders and sent the pound to three-week lows below 1.30, where the 200-DMA lies. Another portion of weak economic data added to the negative sentiment towards sterling. The UK retail sales fell in March, consumer sentiment declined to a five-year low, the same as mortgage approvals, while the balance of payments shortfall widened in late 2018.

Commodities

June Brent crude oil futures added less than one percent for the week. Despite the rise, market participants felt somehow uncomfortable amid the inversion of a key yield curve for U.S. government bonds that fueled concerns over the health of the economy and global oil demand. Besides, investors were nervous awaiting progress in the US-China trade talks. As for the data, the weekly EIA report showed that U.S. crude supplies unexpectedly rose by 2.8 million barrels for the week ended March 22 following two straight weeks of declines. A day earlier, the American Petroleum Institute on Tuesday had reported an increase of 1.9 million barrels. Supplies of gasoline fell by 2.9 million barrels, while distillates declined by 2.1 million barrels. However, the prices managed to rise in the weekly charts due to OPEC+ group commitment to output quotas and lingering global crude oil supply concerns. Baker Hughes reported that the number of rigs drilling for oil fell by 8 last week, the sixth straight week of declines, which added to investor optimism. Technically, Brent needs a decisive break above the $68 figure in order to register fresh highs and avoid another test of the $66 support area.

Gold prices declined significantly last week, with the bullion slipped back below the key $1,300 level. The precious metals bulls faded amid a resurgence of the U.S. dollar index that appreciated after the data releases. Fourth-quarter GDP came in at up 2.2%, which was right in line with the consensus forecast and compares to the last 4Q estimate of up 2.6%. Meanwhile, the U.S. jobless claims report showed a drop in the latest week. The decline in gold prices was also due to month-end flows - traders likely took the opportunity to sell their closing month gold positions and take profits rather than roll those contracts into the next active month. The technical factor also weighed as the precious metal dipped below the important $1,300 psychological level and settled around the $1,290 figure.