Sentiment dominated by US-China trade and dovish central banks
Fawad Razaqzada February 19, 2019 6:54 AM
US investors will be back from a long weekend break today, knowing they have missed very little yesterday. At the time of writing, US stock index futures were trading just below Friday’s closing levels, tracking weaker European markets. Elsewhere, precious metals have gained further ground, while oil has seen little upside follow-through since Friday. In FX, the USD/JPY has rebounded after slight weakness at the back end of last week; the EUR/USD has once again failed to stay above that 1.13 handle and the GBP/USD has struggled to push north of 1.29 amid ongoing Brexit uncertainty. Commodity dollars have weakened along with European equity prices.
Despite today’s slight pullback in risk assets, the start of 2019 has been very good for equities, commodities and government bond prices. The big rally in global equity markets has been led by the US, while Europe has lagged behind slightly. The upsurge in commodities has been led by crude oil, followed by copper and gold. There are two common denominators behind the markets’ strong performance year-to-date: (1) growing optimism over a trade resolution between the world’s largest economies and (2) speculation that major central banks will keep interest rates low for even longer.
Not only have we recently seen the Fed turning dovish, but there are no signs of an imminent rate increases from the likes of the BoJ, BoE and RBA. Indeed, there are now serious doubts that the ECB will tighten its belt in Q3. For that reason, we have seen government bond prices rise and yields fall across the board, which has caused mixed performances in the FX markets with no clear leader among G10 currencies.
Central banks have turned dovish because of concerns over the health of global economy. One major source of uncertainty has been a move towards protectionism, especially in the US. But with the latter potentially on the verge of agreeing a trade deal with China, this has reduced those concerns slightly. Still, the damage might have already been done. Incoming data has been rather poor from some regions of the global economy, not least the Eurozone and in particular Germany. German bund yields have dropped, which has weighed on the euro.
It is possible that US yields could also weaken further as we have seen some warning signs from the world’s largest economy lately, as well. Although there were pockets of strength in some areas of the economy, last week’s data releases from the US were overall disappointing. Among other things, we had a weaker-than-expected inflation report, an unexpected slump in retail sales and a drop in the latest industrial production data.
Further weakness in government bond yields could underpin the lower-yielding and noninterest-bearing assets such as gold and silver even more profoundly going forward, although equities cannot ignore a deteriorating global economy for too much longer. Sooner or later, stock market investors will have to consider the impact on company earnings of a slowing global economy. On top of this, the positivity regarding a potential US-China trade deal will soon be fully priced in.
Figure 1: Global stock indices higher YTD, with US Russell 200 leading the charge while German DAX is underperforming
Source: TradingView and FOREX.com.
Figure 2: Key commodity prices higher YTD, with Brent oil outperforming while silver is lagging behind
Source: TradingView and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.