Daily reviews

23.09.2019

Central banks, trade talks, and geopolitics in market focus

news

Last week, the Federal Reserve reduced interest rates by a quarter percentage point, making its second cut in a row. However, the Fed's dot plot showed the policy makers don't foresee another rate cut this year or in 2020.

  • Global stocks mixed amid conflicting signals
  • China continues to make it cheaper for companies to borrow
  • US and China prepare for another round of trade talks
  • Dollar mixed after a Fed rate cut
  • Geopolitical tensions fuel oil rally
  • Saudi Arabia struggles to recover oil production


Asian equities

It was a volatile week for global markets in general, with Asian stocks have stabilized towards the end of the week after the Chinese central bank cut a key lending rate, making it cheaper for companies to borrow. The People's Bank of China set the one-year Loan Prime Rate at 4.2%, down from 4.25% in August. It was the second small rate cut in two months. The LPR, which will become the new benchmark for banks to price loans, is supposed to better reflect changes in market rates. As a reminder, earlier this month, the central bank slashed the amount of cash banks have to keep in reserve to boost lending.

Meanwhile, trade representatives from the United States and China met in Washington to prepare for trade talks in the coming weeks. The two countries said earlier that they have agreed to return to the negotiating table in October. China promised to exempt American soybeans and pork from its latest round of tariffs, while the US Department of Agriculture said that US companies have begun to export soybeans to China. As a result, on Friday, Japan's Nikkei rose 0.2%, South Korea's Kospi gained 0.5%, China's Shanghai Composite Index added 0.2% while Hong Kong's Hang Seng Index erased earlier gains and edged down 0.2%.


US equities

Last week, the Federal Reserve reduced interest rates by a quarter percentage point, making its second cut in a row. However, the Fed's dot plot showed the policy makers don't foresee another rate cut this year or in 2020. As a result, market expectations for a rate cut in October turned below 50%. Both the Bank of Japan and the Bank of England left interest rates unchanged last week. Meanwhile, the New York Fed for a third time in a row injected liquidity in the markets.

On the data front, U.S. industrial production rose 0.6 percent in August after declining 0.1 percent in July. Initial jobless claims registered 208,000, an increase of 2,000 from the previous week's revised level. U.S. total existing-home sales rose 1.3 percent from July to a seasonally adjusted annual rate of 5.49 million in August.

Major U.S. stock indexes broke a three-week winning streak, closing with modest losses after a volatile trading. On a weekly basis, the Dow dipped 1.05 percent, the S&P 500 declined 0.51 percent, and the Nasdaq shed 0.72 percent.


Currencies

The dollar posted weekly gains against a basket of currencies amid hopes of progress in US-China trade talks and that the Federal Reserve would not lower rates aggressively. US and Chinese trade negotiators continue talks in an effort to lay the groundwork for high-level discussions in October. The USD index was up 0.24 per cent at 98.51 for a weekly gain of about 0.25 per cent.

By the way, sterling managed to trim weekly losses against the dollar after European Commission president Jean-Claude Juncker said that he thought Brussels could reach agreement with Britain on its departure from the European Union. At the same time, the optimism has waned somehow amid the reports that British Prime Minister Boris Johnson said that he did not expect to be able to reach a full legally operable deal covering the Irish border at a meeting of EU leaders. After touching a two-month high at 1.2582, GBPUSD slipped below 1.25, to settle around 1.2470, unchanged in the weekly charts.


Commodities

Oil market grabbed massive attention as prices spiked early in the week, to register four0month highs amid rising geopolitical tensions and an aggressive decline in the Saudi Arabia oil production by over 50% (about 5% of the world’s daily oil production) after a series of drone strikes hit the world’s largest oil processing facility in an attack claimed by Yemen’s Houthi rebels. Yemen’s Houthi rebels claimed responsibility for the attack, saying it was one of their largest attacks ever inside the kingdom. Meanwhile, Washington blames Iran for the strikes, though it did not offer much evidence to back up the claim. The allegation alone ratcheted up fears of a direct military confrontation between Iran and the US, which supported the prices.

In other news, the Energy Information Administration reported a crude oil inventory build of 1.1 million barrels. The authority also reported an estimated 800,000-barrel increase in gasoline stockpiles and a 400,000-barrel rise in distillate fuel inventories. Meanwhile, Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil fell by 14 to 719 last week. That followed declines in each of the last four weeks. As such, after a spike to the above mentioned highs, Brent retreated partially and has settled around the 100- and 200-DMAs around $64. Despite the rally has faltered, upside risks still persist as geopolitical tensions remain elevated.