Daily reviews

24.06.2019

Major central banks signal a dovish shift, boost risky assets

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The central bank kept monetary policy steady on Thursday but showed readiness to ramp up stimulus, siting global risks that are clouding the economic outlook. Moreover, earlier in the week, the ECB Governor Draghi said the central bank will ease policy again if inflation fails to accelerate.

  • Global stocks mostly higher due to central banks’ soft stance
  • Dollar on the defensive amid the dovish Fed and weak data
  • EURUSD at three-month highs due to a weaker greenback
  • Oil rises on geopolitical tensions, hopes for progress in trade talks
  • Gold prices jump to six-year highs on escalating geopolitical situation

Asian equities

Asian equity markets posted a weekly gain amid growing optimism over US-China trade talks and hopes of a rate cut by the Federal Reserve. The MSCI Asia Pacific Index was up more than 3% on the week. The Nikkei Asia300 Index ended the week 4.2% higher, to close at 1,318.18 on Friday. The sentiment improved after Trump said he will have a meeting with China's President Xi Jinping at a G20 summit in Japan. After the Fed Chairman Jerome Powell said the case for a "somewhat more accommodative policy" has strengthened, risky assets received the additional boost.

By the way, Bank of Japan joined the Fed in signaling easing if needed. The central bank kept monetary policy steady on Thursday but showed readiness to ramp up stimulus, siting global risks that are clouding the economic outlook. Moreover, earlier in the week, the ECB Governor Draghi said the central bank will ease policy again if inflation fails to accelerate. Meanwhile, markets in Hong Kong got the additional lift as a political unrest eased after the local government suspended a controversial extradition bill following days of large-scale protests.

US equities

Wall Street had a positive week but finished on a downbeat note Friday, ending the market’s four-day winning streak. However, the market posted its third straight weekly gain, with the Standard & Poor’s 500 index was hovering just below its record-high close from Thursday. The major US stock indexes are up more than 7% so far this month and are gaining more than 14% for the year.

On Friday, the S&P 500 index edged down 3.72 points, or 0.1%, to 2,950.46. The Dow Jones industrial average slipped 34.04 points, or 0.1%, to 26,719.13. The Nasdaq composite fell 19.63 points, or 0.2%, to 8,031.71. But the retreat during the last trading day of the week did little to dent Wall Street’s June rally. The next big market mover is the G20 summit in Japan, with investors will be focused on the potential meeting between the US and China leaders.

Currencies

The greenback was lower against the majors as the latest FOMC monetary policy meeting coupled with weak economic reports fueled a sell-off in the American currency. The Federal Reserve held rates steady but raised the prospect for two potential rates cuts this year. St. Louis Fed President James Bullard voted for a rate cut and thus became the first dissent in Powell's chairmanship. During his press conference, Powell noted the jobs market is healthy, although the Fed is concerned about a few recent weak reports. The Fed expects unemployment to remain low this year and next. Powell also noted business debt has increased and manufacturing has weakened, in part because of trade policy. By the way, Federal Reserve Vice Chairman Richard Clarida said on Friday that the argument in favor of cutting interest rates has strengthened recently as cross currents buffet the U.S. economy amid heightened uncertainty. The comments added to the negative sentiment around the dollar.

On the data front, US business activity took a sharp turn downward in New York State to -8.6, housing starts fell, but prior months were revised up, mortgage applications declined from 33-month high. Meanwhile, weekly jobless claims fell more than expected, current account shrinked in first-quarter on weak imports, the CB leading economic index was unchanged in May, remaining at 111.8, following a 0.1% increase in April, Philly Fed manufacturing index tumbled to a nearly flat reading for June. The existing home sales rise, boosted by lower rates, while the flash manufacturing PMI at 50.6 in June, a 40-month low.

Against this backdrop, EURUSD jumped to three-month highs around 1.1377 and finished above the 200-DMA, which is a bullish technical signal. The rally was rather due to a widespread dollar weakness than on the back of stronger European currency as traders are focused on the potential rate cut by the Fed amid signs of economic weakness. In a wider picture, the euro could correct lower should risk sentiment deteriorate, or ECB officials continue to prepare markets for additional easing.

Commodities

Brent crude rose last week by 5% due to a combination of better risk sentiment and geopolitical risks in the Middle East. Additionally, US gasoline futures, meanwhile, jumped around 4% following a massive fire at Philadelphia Energy Solutions’ refinery in Philadelphia, the largest on the U.S. East Coast. Expectations of an early July meeting of the OPEC and its allies, a potential softening of trade tensions between the US and China also supported prices. Besides, the demand-side outlook has also improved as appetite for risk assets rose after the ECB and the Federal Reserve signalled possible rate cuts. Meanwhile, after two consecutive weeks of crude oil inventory builds, the EIA reported a draw, of 3.1 million barrels for the week to June 14, which gave some respite for traders. US energy firms increased the number of oil rigs operating for the first time in the past three weeks. According to Baker Hughes, companies added one oil rig in the week to June 21, bringing the total count to 789.

Gold prices jumped to six-year highs above $1,400 on a combination of escalating geopolitical situation between the US and Iran and concerns over global slowdown after the US Fed revised down its growth forecast. The bullion rallied due to safe haven demand which increased significantly after Iran shot down a US military drone, which Washington treated as an act of aggression. This increased the probability of a military response. By the way, on Sunday Trump said that the US will impose "major" additional sanctions on Iran in a bid to prevent the country obtaining nuclear weapons. According to him, economic pressure would be maintained unless the leadership in Tehran changed course. As a reminder, earlier, Iran announced it would exceed internationally agreed limits on its nuclear programme. In this context, the yellow metal demand could stay elevated but considering the overbought conditions, a bearish correction could take place in the short term.