Daily reviews

11.02.2019

Trade fears back in focus, economic forecasts get slashed

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Considering the series of nasty surprises, global markets spent last week relatively steady. Most Asian markets were closed for the Lunar New Year, so the lower liquidity added to the negative pressure on the regional stocks, while the US shares felt somehow better due to mostly positive corporate results. In general, concerns over the global economy and trade made investors cautious and nervous, while the dollar staged an impressive rally amid the prevailing risk off sentiment and despite a fall in the 10-year Treasury yields. The upside potential in the oil market was capped by global worries, while Venezuelan sanctions receded into the background. Gold prices has to retreat from recent peaks amid a stronger dollar but the pressure remains limited.

  • Trump rattles investor nerves

  • Dollar back on the rise

  • Cutting economic forecasts becomes a trend

  • Oil market at a loss

  • Gold off highs but stays afloat


Asian equities

Asian markets that were not off for the Lunar New Year traded mostly lower. Risk aversion intensified later in the week after the reports that a meeting between U.S. President Donald Trump and Chinese President Xi Jinping was "highly unlikely" before March 1. Meanwhile, White House economic advisor Larry Kudlow said China and the U.S. were still far away on striking a trade deal. As a result, concerns over trade took the indexes lower. Hong Kong's Hang Seng index slipped 0.2%, Japan's Nikkei 225 declined 2.0%, the Topix shed nearly 2.0% as well, while South Korea's Kospi shed 1.2% and finished the trading week at 2,177. Nikkei 225 was the biggest loser despite the yen was lower for the week. It was in part due to a decline in the index heavyweight Fast Retailing which lost 0.5%. The company’s shares registered a decent one-day drop during the week and lost nearly 3% after its Uniqlo clothing chain reported a decline in same-store sales in January.

As for the trade theme which is back in market focus, the two countries should strike a deal before the start of March. Otherwise, Washington will introduce additional tariffs on Chinese goods. As the meeting between Trump and Xi won’t take place before the deadline passes, the risk of a no-deal rises. As a result, concerns over escalation of a trade war are growing, as Beijing could take tit-for-tat measures against the US. In this context, the general picture doesn’t bode well for risky trades, both in Asia and in the global markets in general.

US equities

US markets looks a tad better, though weekly gains were very modest. The Dow added just 0.2% for the week, the S&P 500 index rose by a mere 0.1%, while the Nasdaq Composite Index added 0.5%. The weekly results could have been better but for Friday’s decline on fresh trade-related fears. The market doesn’t like uncertainty, which now comes both from trade and global economy. S&P 500 touched a high of 2,737 earlier in the week but failed to preserve the momentum due to a widespread shift to safe assets. Nasdaq Composite also registered a high at 2,538 for the first time since early December but had to retreat later in the week as well.

The focus now is really on China, but growth worries persist as well. There are more alarming signals from this front lately. In particular, the European Commission slashed its 2019 growth forecast for the euro zone to 1.3 percent from 1.9 percent in autumn. The Commission has cut Italy’s growth forecasts to the lowest level in five years and also highlighted that even the lower estimate was vulnerable to large uncertainty from slowing growth in China and weakening global trade. Though it is a more of a concern for Europe, it highlights the vulnerability of the global economy in general and adds to worries and uncertainty across the globe.

Currencies

The dollar enjoyed the strongest week since August despite trading ranges were rather limited. The USD index was up 1.1% for the week. The renewed trade worries played into dollar’s hands. But in the end of the week, the reports that tariffs on Chinese goods were likely to stay at 10% after the deadline in the absence of an agreement have somehow limited the safe-haven demand. Anyway, uncertainty on this front does help the buck which is regaining its appeal after a hard January. The US currency seems to have finally shrugged-off a more dovish Fed’s message and shifted its focus to the global worries. Besides, the US data looks really better in comparison with the macroeconomic signals from other major countries. This in turn suggests that not only the Fed will refrain from further rate hikes this year, but other central banks won’t dare to start tightening due to global risks in trade, politics, geopolitics and economy. In this context, the greenback still looks attractive despite the increasing talks about the global de-dollarization. A source of downside risk for the US currency is the government issue – another shutdown could be coming as the temporary spending bill that reopened the US government ends at February 15.

The EURUSD pair dropped dramatically over the last week. The price slipped from the levels above 1.1450 and found a bottom marginally above the 1.13 threshold. The European commission slashed its forecasts dramatically, which increases the selling pressure on the common currency that had already suffered from further dismal economic data in the euro zone. The latest reports confirm that the region’s economy slowed down late last year and could continue to lose momentum in 2019. This in turn makes investors further push back expectations of a rate hike by the ECB later this year. By the way, most market participants don’t bet on the first hike in 2019 at all. Technically, the euro needs to break above 1.14 for the bulls to regain control of price action. But should the pair lose the 1.13 support area any time soon, the general picture for the common currency will get even worse.

Commodities   

 Crude oil prices suffered losses during the course of the week, with Brent failed to break above the $62 barrier once again. The prices registered a 2019 high around $63.60 but were quickly rejected from the local top and turned red, still threatening the $60 psychological support. The market behavior reflects the lingering concerns, from demand prospects to trade war and oversupply worries. The global economy shows further signs of weakness, while central banks, governments, and independent agencies continue to cut their forecasts, citing trade-related uncertainty among other factors. Last week, the Bank of England and the European Commission slashed their forecasts dramatically. This coupled with still strained relations between the US and China makes traders worry about the prospects for global demand.

Meanwhile, the downside pressure on prices remains limited so far due to other factors including the Venezuelan crisis and OPEC+ efforts. According to some estimates, OPEC’s crude oil production declined by nearly 1 million bpd in January, marking the lowest production for the cartel since March 2015. A monthly OPEC report is due this week, as well as the IEA report. Meanwhile, US drilling activity picked up last week, according to Baker Hughes report. Companies added 7 oil rigs in the week to February 8, bringing the total count to 854. The report points to further increase in US crude production in the weeks to come. Current output is at a record 11.9 million bpd. This week, oil traders will focus on the US-China trade talks, with any signs of progress towards a deal could ease the downside pressure in prices.

Gold was slightly lower on the week, continuing to retreat from 9-month lows. The bullion managed to stay above the $1300 level which shows the metal’s relative resilience in the face of dollar strength which drive the metal lower. The mostly negative sentiment in the global financial markets caps the downside pressure on safe-haven gold as well. Global growth concerns and the renewed trade tensions will likely further limit the downside pressure on the yellow metal, and as the chances of striking a deal between UC and China before March 1 deadline expires, the bullion could yet turn positive this month and resume the upside move should the two countries fail to reach a substantial progress in the weeks to come. On the other hand, the upside will likely be further limited by dollar strength – the US currency lied for a seventh straight day on Friday and could remain on the offensive in the near term.