Daily reviews

25.02.2019

Trade-related optimism fuels demand for stocks, oil

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Global stocks extended gains last week on rising optimism over the US-China trade talks. The dollar index registered its first weekly dip in three. On the final day of the negotiations, Trump raised hopes that the two world’s largest countries will be able to settle the trade dispute ahead of March 1 deadline.

  • Stocks continue to benefit from optimism over trade talks

  • Dollar demand subdued due to positive trade-related headlines

  • Fed uncertain about the economic outlook

  • Oil prices at new three-month highs on easing oversupply concerns

  • Gold pushed to multi-month highs despite risk-on sentiment


The US leader called the trade talks ‘very productive’ in his new tweet. He also said there was a good chance a deal would emerge and hinted once again that he might extend the deadline and thus put on hold a scheduled increase in tariffs from 10% to 25% on $200 billion worth of Chinese imports. There are also reports that the two countries have reached an agreement on currency issues, but no details were given. Investors will continue to focus this theme as the next major event will be a meeting between Trump and Xi that may take place next month.


Asian equities


Asian stocks also saw a rather positive week, supported by optimism over trade. China’s markets were closed on February 15–21 for Lunar New Year holidays. After a holiday break, the Shanghai Composite Index surged to two-week highs and had the best rally in more than 18 months. The index could extend gains on further signs of progress in the US-China negotiations. Hong Kong’s Hang Seng Index broke the two-week losing streak. The index was trading close to two-week highs. On Friday, Hang Seng declined 1.5% as the bulls decided to take a pause ahead of the weekend. Japan’s Nikkei Index was stable last week after three weeks of weakness.

The bullish sentiment in the region has somehow abated in the second half of the week. One of the drivers that capped the enthusiasm was the selloff in US equities after the minutes of January FOMC meeting as the Federal Reserve sounded not as dovish as expected and made investors doubt that the central bank will refrain from hiking rates this year. In general, investor sentiment is still supported by hopes of striking a trade deal between the US and China, and this factor will likely keep stocks afloat further.


US equities


US stocks rose last week, with the rally continued on Friday as another round of trade talks between the US and China inspired investor hope for striking a deal. The Dow Jones Industrial Average broke above the 26,000 figure for the first time since early November and posted its ninth consecutive weekly gain. The rally was in part due to Intel stocks that rose aggressively after Morgan Stanley upgraded the company to overweight from equal weight and hikes its price target on the stock to $64 per share from $55. The bank also recommended to buy Intel shares as they could get a boost from CEO Bob Swan's leadership. Since the start of the year, Intel shares are up nearly 10% while AMD and Nvidia appreciated by 30% and 16% respectively. The Nasdaq Composite advanced as well, gaining nearly 1% on Friday. The Nasdaq also registered its ninth straight weekly gain, its longest streak since May 2009.


Currencies


It was a mixed week for the common currency, but the overall dynamics was positive due to a better risk sentiment and somehow positive European economic data. As such, German ZEW investor confidence improved to a 5-month high in February, and German producer prices rose 2.6% in January. Meanwhile, German Ifo business confidence reached a 4-year low, while euro zone current account surplus shrunk further in January. The ECB’s Praet said the central bank could change rate guidance if outlook worsens. In its meeting minutes, top ECB officials expressed worries over the slowdown in economic growth that might be deeper and more broad-based than previously suspected.

Despite mixed signals, the euro rose in the weekly charts, though the pair finished off the highs around 1.1370. In part, it was due to a weaker dollar demand against the backdrop of positive investor sentiment over the trade talks. Further on, the common currency could face some downside risks from the international front. In particular, the theme of US-EU trade war. EU said to prepare to hit Xerox, Caterpillar and Samsonite if the US puts tariffs on cars. So Brussels wanted to show that is has a counterattack ready. So far, the heating rhetoric won’t hit the euro broadly, but in case of further escalation the currency may lose its appeal.

USDJPY extended gains for a third week in a row. The pair failed to challenge the 111.00 figure and hold above the 100-DMA as the upside impetus was limited despite the lack of safe-haven yen demand. By the way, the yen was the third worst performing major currency on the last trading day of the week. Weak Japan economic data also played against the currency. Core machinery orders were down 0.1% in December, exports posted the worst fall in two years, the manufacturing sector fell into contraction in February. Meanwhile, Japan’s consumer inflation picked up a bit but still was distant from the Bank of Japan’s goal. The central bank’s Kuroda said he was ready to ease the policy further if yen rise hurt the price goal path and if economy loses momentum.

Apart from easing trade tensions, risk sentiment also saw support from FOMC meeting minutes that signaled an end to the balance sheet reduction and the possibility of restarting rate hikes some time later should the economic data turn more positive.


Commodities


Crude oil prices staged a second consecutive weekly rise mainly due to progress in US-China trade talks that adjusted expectations for global demand. Positive expectations over a trade deal coupled with OPEC-led production cuts helped to somehow ease concerns over surging US production. However, the US shale boom continues to cap the bulls’ enthusiasm as the crude oil output reached another record high during the previous week, rising to 12 million barrels per day. Meanwhile, according to Baker Hughes data, the energy firms cut the number of oil rigs operating for the first time in three weeks. The total count was down by four to 853 from 857.

Brent extended gains to fresh November highs marginally below the $68 threshold, though finished around the $67 figure as the sentiment turned worse in the second half of the trading week. The rally stalled ahead of the $68 mark as bulls decided to take a pause. On the other hand, market participants refrained from profit-taking as the sentiment remains mainly positive in the commodity sector due to easing concerns over the global oversupply. Further on, oil dynamics will depend on the developments in the US-China trade relations, with further signs of progress could send the barrel higher.

It was a roller-coaster week for gold prices that rallied to ten-month highs above $1,346 and then retreated partially and settled below $1,330. The bullish driver was weaker USD at the start of the week but the positive risk sentiment capped the upside potential in the bullion. The priced peaked after the FOMC meeting minutes turned out not as dovish as expected. Against this backdrop, the US Treasury yields rose and capped gold’s attractiveness. But due to a bounce on Friday, the yellow metal managed to its second weekly gain, also due to dismal US economic data that stoke worries about the global economy.