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18.03.2019

Risk-on sentiment prevails, dollar on the defensive ahead of FOMC meeting

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The regional investors cheered the news that the Chinese government would cut value-added taxes, reinforcing expectations for an eventual pick-up in the world’s second-largest economy. There was also optimism over the US-China trade talks amid the reports on further progress and after a vote in the UK - lawmakers delayed a potentially chaotic exit from the European Union.

  • Further progress in the US-China trade talks fuel investor optimism
  • The UK lawmakers delay a potentially chaotic exit from the EU
  • Dollar mostly lower ahead of the important FOMC meeting
  • Oil prices remain elevated due to easing global concerns
  • Gold could receive a boost from dollar weakness

Asian equities

The regional investors cheered the news that the Chinese government would cut value-added taxes, reinforcing expectations for an eventual pick-up in the world’s second-largest economy. There was also optimism over the US-China trade talks amid the reports on further progress and after a vote in the UK - lawmakers delayed a potentially chaotic exit from the European Union. According to Xinhua news agency, Chinese Vice Premier Liu He spoke by telephone with U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, with the two sides making further substantive progress on trade talks.

Nikkei 225 recovered partially from a plunge that took place a week earlier but the index is yet to make further comeback to offset the previous losses. The price rose from a low of 20745 to a 21375 and finished the week slightly off the highs. The Bank of Japan decided to keep the short-term interest rate at -0.1 percent and said that it will buy Japanese government bonds to ensure that 10-year JGB yields continue to float around the zero percent mark. The central bank also noted that that it will «continue its moderate expansion, despite being affected by the slowdown in overseas economies for the time being.»

US equities

The S&P 500 saw its best week since the end of November last week, while the Nasdaq had its best weekly gains so far this year. The optimism was due to a combination of factors including the avoidance of a no-Brexit deal, continued signals from the Chinese authorities on further stimulus, generally dovish position by major central banks, as well as the continued progress and optimism on US-China trade negotiations.

China’s congress on Friday endorsed an investment law that aims to address complaints, particularly from the U.S., that China’s system is rigged against foreign companies. As a reminder, Washington claims China forces companies to share technology in order to do business in the country. Last week, it was reported that the summit between US President Donald Trump and Chinese President Xi Jinping was to be pushed into April. Now, there are speculations that the summit could be delayed to June.

Currencies

More negative economic data coupled with a relatively positive risk sentiment kept the dollar under pressure against major counterparts. Friday releases showed U.S. manufacturing output fell for a second straight month in February while factory activity in New York state hit nearly a two-year low this month, confirming a sharp slowdown in economic growth in the first quarter. Other reports showed that UD business inventories rose and sales dropped the biggest in three years. Retail sales rebounded slightly in January, a month after biggest decline in 10 years. NFIB optimism index inched higher last month but it was still the second-worst level since election. Producer prices rose less than expected. Import prices posted the largest gain in nine months, while core capital goods orders posted biggest gain in six months. Meanwhile, Fed Chair Powell said Trump’s attacks played no role in rate pause. This week, market focus will be on the FOMC two-day meeting that concludes on Wednesday. Citing the latest comments by Fed officials, investors expect the central bank to cut its outlook for rates and economy, which could put the greenback under additional pressure.

Considering the economic data from the euro zone was mixed, the euro price action was driven mostly by counter currency movements and global risk sentiment. The latest Brexit developments added to the optimism as no-deal was rejected, Brexit extension supported. Also, there were signs of a deal being worked on between the UK government and DUP. As for the data, German government has lowered its GDP forecast again. Germany January trade balance was at €14.5 billion versus €15.2 billion expected, while consumer prices index rose by 0.4% in February. Industrial production in the euro zone was up 1.4%. Technically, EURUSD stalled ahead of the 1.1350 area, with the immediate resistance now comes at 1.1365, where the 100-DMA lies. On the downside, the 1.13 handle stands as a local support. Considering downside risks for the dollar from the upcoming Fed meeting, the pair could extend the rally in the days to some.

Commodities

Brent crude gained 2.2% over the last week. The prices touched a fresh 2019 high above the $68 handle and has settled around the $67 figure since. Crude markets remain broadly supported by supply cuts led by producer group OPEC and U.S. sanctions against Iran and Venezuela. Oil prices have gained around a quarter since the start of the year. OPEC's de-facto leader Saudi Arabia said on Sunday that balancing oil markets was far from done as inventories were still high, which curbed market optimism. Meanwhile, Russia said production cuts would stay in place at least until June. On the other hand, The International Energy Agency said on Friday it expected oil markets to be in a modest deficit from the second quarter of 2019. In the US, the number of rigs drilling for new oil production has been falling this year, and hit its lowest level since April 2018 last week, at 833 operating rigs. O=Crude oil output has since dipped back to 12 million bpd from a record 12.1 million, which has brought some relief to investors as inventories also declined.

Gold prices extended modest gains last week, with the bullion has regained the $1,300 figure but further outlook still looks uncertain. On the other hand, the recovery is setting the stage for prices to make another move higher this week, should the FOMC meeting provide the right kind of push. On the other hand, the improved risk sentiment curbs the safe-haven gold demand. In this context, market participants will continue to closely follow the developments surrounding Brexit, US-China trade relations, as well as the signals from major economies and central banks. Positive news and further gains in the equity markets could dent the appeal of the precious metal down the road. Technically, the bullion needs to confirm a break above the $1,300 level in order to overcome the next local resistance at $1,310 and target the $1,330 once again. Further weakness in the dollar may support the yellow metal in the coming days.