Daily reviews

18.02.2019

Risk rally spreads across the markets, trade talks to continue

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It was a busy and fruitful week for riskier assets, lifted by positive investor sentiment and hopes of resolving of the US-China trade dispute. The two countries finished their negotiations in Beijing on Friday, with both sides said the talks were productive and efficient. Trump has said he may extend a 1 March deadline after which tariffs on $200 billion worth of Chinese goods are set to more than double.

  • Riskier assets rally across the board

  • US-China trade talks to continue

  • Dollar shows its strength and resilience

  • Trump averts another government shutdown

  • Oil prices at three-month highs


The officials will plan to resume negotiations in Washington in the coming days, in an effort to resolve the trade spat that makes global markets worry about the outlook for global economy. Other good news is that Trump signed a spending package to avert another government shutdown and declared a national emergency to bypass Congress and obtain $8 billion for his border wall. Meanwhile, economic reports continue to signal a slowing global growth. The US retail sales suffered the biggest fall in nine years, while German economy narrowly avoided recession in Q4, which disappointed the euro bulls.


Asian equities


The regional stocks turned lower on Friday but managed to stage a decent rise on a weekly basis. The positive sentiment weakened amid fresh jitters about the US economy after retail sales dropped the most in a decade, while China’s producer prices rose at the weakest pace since 2016. Earlier in the week, investor sentiment was driven by positive expectations ahead of another round of trade talks. The markets had a really fruitful week but the risk-on tone abated on Friday amid a combination of resurged economic concerns and some doubts in the progress in the relations between the US and China amid a lack of details.

Japan’s Nikkei 225 rallied to a high of 21,235 for the first time since mid-December and closed the week at 21,200 amid a widespread yen weakness. The USDJPY pair rose above 111.00, though finished the week below the psychological level. The Japanese currency demand ebbed against the backdrop of risk-on sentiment in the global financial markets. As for the economic data from Japan, the numbers were mostly mixed. In particular, M2 money supply came in line with expectations and the previous reading of 2.4% growth, machine tool orders declined by 18.8% after a dip by 18.3% previously, producer prices rose by 0.6% year-over-year, the country’s economy grew 1.4%, which was the first expansion in two quarters, while the tertiary industry activity declined by 0.3% from the previous month.


US equities


Later on Friday, world stocks, including Wall Street, bounced back after some retreat after the officials said trade talks between the US and China would continue in Washington next week. The two sides expressed optimism over the negotiations but gave no details, which makes investors nervous despite some progress. Anyway, the stocks had a good rally due to a recovery in risk sentiment. Dow jones, S&P 500 index and Nasdaq broke above the 50-DMAs. Bank stocks rose decently on earnings results. In particular, Bank of America and Goldman Sachs highlighted in their reports that the economy seems to be in good shape.

S&P 500 rose to an early-December high of 2774,25 and finished around the peaks. Hopes of progress towards a deal with China pushed the stocks higher and helped to shrug-off the dismal US retail sales data. The sales posted their biggest drop since September 2009 and delivered more evidence that holiday sales fizzled unexpectedly in December. According to the official data, retail sales fell 1.2 percent from November and were up 2.3 percent from December 2017. Total retail sales for 2018 rose 5 percent from the previous year. Excluding gasoline station sales, retail sales dropped 0.9 percent in December. However, some analysts questioned the reliability of the data, which also helped investors to focus on the trade negotiations.


Currencies


The economic releases from the euro area were a disappointment as well. Industrial production declined by 0.9%, the GDP growth slowed to 1.2% in the fourth quarter, while German economy recorded zero growth in the fourth quarter of 2018, narrowly avoiding falling into recession in the second half of last year, after reporting a contraction of 0.2% in the third quarter amid a slump in industrial output. Against this backdrop, the common currency had to retreat further but trimmed losses by the end of the week. A weekly low was registered at 1.1233, from where the prices have recovered to nearly 1.13 but remained below the 200-weekly moving average. Apart from European data and headlines, the euro was influenced by both global risk sentiment and the general dollar dynamics.

USD demand surged despite a better risk tone as traders shrugged off the Fed’s dovish shift and realized that the US currency still remains more attractive than its peers due to higher yields and a better state of the economy. Meanwhile, the avoidance of another US government shutdown with a new border security bill could add to the USD appeal in the days to some.

Apart from economy and dollar, the euro feels the additional downside pressure from the unstable political landscape in Europe. The biggest political concern now seems to be the call for a snap election in Spain – the third time in four years already - by prime minister Pedro Sanchez after losing a budget vote in Parliament. Spain is reported to hold early election on April 28.


In the coming days, EURUSD could have a chance for a recovery as dollar demand may abate ahead of the FOMC meeting minutes results due on Wednesday.


Commodities


Crude oil prices rose dramatically last week. Brent topped the $66 mark for the first time this year. The rally was due to a number of factors, including the general risk-on tone in the global markets amid optimism over the trade talks, output cuts from OPEC, Saudi Arabia plans to limit the production more than expected according to the deal. Saudi Energy Minister Khalid al-Falih said the kingdom plans to produce 9.8 million barrels a day in March, about half a million barrels below the earlier agreed levels and down from 11.1 million bpd in November. Apart from these factors, the rally is encouraged by geopolitics. In particular, these are the threats of militant attacks on Nigeria's oil infrastructure, the conflict over Libya's biggest oil field and the US sanctions on Venezuela and its energy sector. A successful test of the important level of $66 and a break above the 100-DMA around the mentioned high will open the way for further gains.

Gold prices registered a positive week after a decline earlier. The yellow metal received a boost towards the end of the week, as the dollar demand started to abate. The prices hit two-week highs above $1,322 on Friday. Subdued inflation and disappointing retail sales data from the US supported the Fed’s stance of being patient with further rate hikes, which lifted the bullion’s appeal amid weaker dollar. Besides, the lack of sustained pressure on gold despite a generally robust US currency confirms that investors remain somehow cautious despite the reported progress in trade negotiations between the US and China. This week, the precious metal’s behavior will further depend on investor sentiment and dollar dynamics, with the FOMC meeting minutes and further trade talks will set the direction for markets.