Daily reviews

08.04.2019

Trade-related optimism keeps investors bullish, oil at fresh 2019 highs

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As a reminder, US crude oil production increased by about 100,000 barrels per day to 12.2 million barrels. The data show that after a pause, the producers’ activity is rising again, with further increase could be registered in the weeks to come.

  • US and China report further progress in trade talks but many issues are yet to be resolved
  • World stocks are mostly higher on trade hopes, easing global concerns
  • Dollar finished as a net winner after strong NFP employment data
  • Euro shows negative technical signals
  • Oil prices jump to fresh highs due to geopolitics

Asian equities

Stocks were mostly higher during the last week, with optimism over US-China trade deal fueled risk-on sentiment. The two countries are getting closer to the deal, having resolved most of the outstanding issues but are still haggling over how to implement and enforce such an agreement. Chinese negotiators, led by Vice Premier Liu He, and their U.S. counterparts discussed the text of an agreement regarding technology transfers, intellectual property protections, non-tariff measures, services, agriculture, trade balance and enforcement. Beijing wants Washington to remove existing U.S. tariffs on Chinese goods and, for its part, the United States wants China to agree to terms of an enforcement mechanism ensuring it abides by the deal. Meanwhile, in a separate commentary on Friday, Xinhua said that «the remaining issues are all hard nuts to crack». The White House reported on Friday evening that «significant work remains, and the principals, deputy ministers, and delegation members will be in continuous contact to resolve outstanding issues». As such, despite the remaining optimism, investors are still concerned over these «outstanding issues» and continue to closely monitor the trade developments.

Major Asian stock markets edged up on Friday, though the liquidity was rather low as markets in China and Hong Kong were closed for a holiday. The Nikkei 225 in Japan advanced 0.38% amid gains in Fanuc and Hitachi Construction Machinery which advanced 1.21% and 1.15%, respectively. The data showed that Japanese household spending rose less than expected in February, rising 1.7% in February as compared to the year before, as compared to a median estimate for a 2.1% annual increase.

US equities

On Wall Street, the benchmark S&P 500 had closed higher for its seventh trading day in a row last week, the longest winning streak since October 2017. For the week, the S&P 500 gained 58.34 points, or 2.1%. the Dow added 496.31 points, or 1.9%, while the Nasdaq rose 209.37 points, or 2.7%. For the year, the the S&P 500 is up 385.89 points, or 15.4%, the Dow is up 3,097.53 points, or 13.3%, and the Nasdaq is up 1,303.41 points, or 19.6%.

On Friday, March's strong jobs report beat expectations and eased fears about the state of the economy, while investor optimism that the US and China will come to an agreement over their trade dispute added to the positive sentiment in the markets. Energy was the best performing sector in the S&P 500 on Friday, climbing 1.7% amid a rally in the oil market.

As for individual stocks, Amazon.com Inc. shares rose 1% after the founder Jeff Bezos and soon-to-be ex-wife MacKenzie reached a deal where she will get 4% of the company’s outstanding stock, worth about $36 billion, as part of their divorce settlement. Intel Corp. shares declined 0.6% after analyst Aaron Rakers at Wells Fargo Securities lowered the stock to market perform from outperform, citing elevated valuation and competition from Advanced Micro Devices Inc.

Currencies

The greenback was mixed during the week as rising risk sentiment curbed demand for safe-haven currency while the key NFP employment report on Friday supported the dollar that managed to finish as a net winner. On the data front, US retail sales fell in February on lower spending on building materials, groceries, and electronics. Meanwhile, the manufacturing activity rebounded in March, while construction spending registered a nine-month high in February. ADP reported that private sector hiring fell to 18-month low, weekly jobless claims dropped to the lowest since 1969. Meanwhile, US Nonfarm payrolls expanded by 196,000 and the unemployment rate held steady at 3.8% in March. That was better than the 175,000 estimate. Wage gains were just 0.14% for the month and 3.2% year over year, below expectations of the 3.4% pace from last month.

EURUSD was marginally lower for the week after somehow mixed dynamics. The pair failed to break above the 1.1250 local resistance and had to retreat. The euro closed above the 1.12 handle but challenged the psychological level earlier, which is a negative technical signal. On the data front, euro area annual inflation was down to 1.4%, the unemployment rate was at 7.8% (Italian unemployment rate rose to 10.7% from 10.5%), while business investment rate was up to 23.7%.

In the minutes of the European Central Bank Governing Council's March meeting, the bank noted that the persistence of uncertainties continued to weigh on the growth outlook. The bank highlighted that the incoming data had continued to be weak, in particular in the manufacturing sector, measures of underlying inflation remained muted, domestic cost pressures, in particular wages, had been strengthening, but had yet to translate into higher underlying inflation. The central bank also expressed concerns about the potential impact of trade protectionism on the global outlook and the ongoing risk of an escalation of trade conflicts. Members agreed to extend the Governing Council’s forward guidance through the end of 2019 as part of the overall package.

Commodities

Oil prices increased during the week ending April 5, with the price Brent crude oil for June delivery up 2.85 percent. So far this year, Brent rose 30.74 percent. OPEC lowered its daily production in March, easing concerns over a potential global oversupply, and official data showed Russia oil production fell last month. On Wednesday, U.S. report showed that crude oil inventories surprisingly increased in the previous week. According to the EIA, for the week ending March 29, U.S. commercial crude oil inventories increased by 7.2 million barrels versus expectations of a drawdown of 0.43 million barrels. On Friday, oil prices rallied amid strong U.S. employment data, easing worries over weakening oil demand due to potential economic slowdown.

As a result, Brent broke above the $70 key resistance and extended gains on Monday to $70.75. The latest rally was due rising tensions in Libya as the Libyan National Army headed by Khalifa Haftar advanced on the capital, Tripoli. As such, geopolitics overshadowed the biggest increase in U.S. active rigs since May. US oil-directed rigs increased by 15 from last week to 831, according to Baker Hughes. As a reminder, US crude oil production increased by about 100,000 barrels per day to 12.2 million barrels. The data show that after a pause, the producers’ activity is rising again, with further increase could be registered in the weeks to come. Technically, Brent needs to stay above the $70 handle in order to avoid an aggressive profit taking should the risk sentiment deteriorate.