Daily reviews

10.06.2019

Sign of relief on the trade front and dovish Fed fuel risk appetite

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After a jump on Friday, US stocks built on strong weekly gains, mainly as weak economic data and Fed’s dovish rhetoric increased the odds of a rate cut from the Federal Reserve.

  • Risk sentiment improves on hopes for easing trade tensions
  • Dollar on the back foot after weak US employment data
  • Fed’s dovish tone fuels expectations of a rate cut
  • Euro cheers a less dovish ECB’s rhetoric

Asian equities

Global equity markets were mixed-to-positive last week after a slowdown in job growth fueled hopes of a U.S. interest rate cut, while hints of progress in Washington’s trade wars added to equity market optimism. Mexico agreed to the “deployment of its National Guard throughout Mexico, giving priority to its southern border.” The statement brought some relief and supported regional stocks but lack of progress in the US-China trade relations capped the upside.

As a The Shanghai Composite Index posted its sixth straight trading day of losses, while Hong Kong bounced into slight gains near the close amid worries over the ongoing US-China trade war. The Shanghai Composite began down Thursday and stayed bearish, ending with a loss of 1.17 per cent to 2,827.80. Over the week, the index lost 2.45 per cent and reached the lowest level since February 22. In Hong Kong, the Hang Seng closed up 0.26 per cent, ending at 26,965.28, in its second straight day of gains. On the week, the index rose by just 0.24 per cent. By the way, it was its first week of gains after four weeks of losses.

US equities

After a jump on Friday, US stocks built on strong weekly gains, mainly as weak economic data and Fed’s dovish rhetoric increased the odds of a rate cut from the Federal Reserve. Market expectations for a Fed rate cut in June rose to 27.5% from 16.7% after the employment data release. The Dow jumped 4.7%, its biggest weekly gain since November. The index also snapped a six-week losing streak. The S&P 500 and Nasdaq were up 4.4% and 3.9% on the week, respectively.

Trump tweeted “there is a good chance” the two countries can make a deal. This would keep the administration from slapping a 5% tariff on all Mexican imports into the U.S. As for individual stocks, Apple shares rose more than 2.5% along with Microsoft. For the week, Apple soared more than 8% while Microsoft gained 6.3%. Meanwhile, such bank giants as Citigroup, J.P. Morgan Chase and Bank of America all fell more than 1%.

Currencies

The greenback saw a mainly bearish week amid rising expectations of a rate cut by the Fed, weak economic data from the US and improved risk sentiment on signs of easing trade tensions between the US and their trade partners. On the data front, ISM manufacturing index fell to 52.1 for May, compared to expectations for 53, US factory orders fell, shipments posted the largest drop in two years, private sector employment increased by just 27K jobs from April to May according to the ADP National Employment Report, while the key report showed that NFP employment increased by 75K, which spiked the odds of a rate cut from the Federal Reserve on signs of a potential slowdown in the economy amid the ongoing trade wars. AS for the central bank, the dollar was substantially weaker after Fed’s Bullard said a rate cut may be “warranted soon”. Meanwhile, Fed’s Vice Chair Clarida noted that if the country’s economy slows, the regulator will implement policy to keep it in a good place. Powell himself stated that the Fed will act as appropriate to sustain the expansion. All the comments were assessed as bearish and added to the negative pressure on the US currency.

Against this backdrop, EURUSD managed to extend the recovery from lows around 1.11 and closed above 1.13, marginally below the 200-SMA in the weekly charts. Meanwhile, the European data was mixed. German service sector maintains solid rate of business activity growth in May, volume of retail trade was down by 0.4% in the region, German factory orders unexpectedly gained, while euro zone GDP was up by 0.4% and employment up by 0.3% in the euro area. As for the ECB meeting, the central bank said that it plans to leave rates on hold at least through first-half 2020. A less dovish tone than expected sent the euro higher across the board, while better risk sentiment also helped.

Commodities

Oil prices gained for the week. The market received a boost from news of a possible progress between the U.S. and Mexico over tariffs and some expectations that major oil producers will extend their production-cut agreement. Brent managed to rebound above $63 from the lows below $60. Earlier in the week, Brent nursed steep losses after the weekly report published by the U.S. Energy Information Administration on Wednesday showed a larger-than-expected increase in crude oil stockpiles. Following Tuesday's API report, which showed that crude oil stocks in the U.S. grew by 3.5 million barrels in the week ending May 31, the EIA announced that commercial crude oil inventories rose by 6.8 million barrels compared to expectations of a draw of 0.8 million barrels.

After traders digested the data, the prices started to recover on hopes for resolving the trade issues between the US and their trading partners. Meanwhile, Russian and Saudi energy ministers, Alexander Novak and Khalid al-Falih, are scheduled to chair a trade and economy commission in Moscow on June 10. According to the reports, the two ministers will likely hold discussions over plans to extend the current production curbs. As a reminder, OPEC is still officially scheduled to meet on June 25 to discuss an extension with its non-member allies.