Monday, January 14, 2019

Chinese trade data and the US government shutdown dampen investors' risk appetite

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

Trading action kicks off on a bearish note this week with risk aversion on the rise once more, the Dollar seems to sustain last week's gains but equities turn to the downside. Another round of softer data from China, this time regarding imports and exports, highlights the slowdown in the Asian nation, further underpinning the risk-off tone. At the same time, the US inflation report on Friday confirmed that inflation in the States is cooling down as energy prices have declined. Gold consolidates while Oil pulls back after hitting $53 per barrel.

Maybe more important than the above though is tomorrow's vote in the British Parliament on Theresa May's Brexit plan. The stakes are really high for the British PM as if her plan is shot down she will be left with only a handful of choices: either call for elections and put her political future in jeopardy, or push for a second referendum which will be considered a defeat for May after having repeated many times that “she plans to deliver Brexit as the British people demanded” or finally take the UK out of the EU without an exit agreement - a catastrophic scenario.

The Pound shot to 1.2850 on Friday on rumors that the Brexit date may be delayed for 6 months and it remained at these levels even though the Government rejected such a scenario. Tomorrow will be a crucial date for Sterling and a defeat for May in the Parliament should take prices towards 1.27 immediately and depending on which of the above options she chooses we may see further losses or a swift reversal. Of course, in the off chance that May succeeds in getting her plan approved the next stop for the Pound lies at the 1.30 handle.

The Euro fails to hold above the 1.15 mark even though it was initially able to extend its early gains to 1.1550. The fresh data from Europe alongside the persisting political risks in France seem to be giving investors headaches; moreover, the fact that the ECB has hinted on further delaying its rate hiking schedule also dampens the currency's outlook. So does this mean that we should alter our broader outlook for the Euro to outperform the Dollar at the start of the year?

We think it's still early to call it a day for the Euro but this will largely depend on two things: Eurozone performance and trade war developments. If the trade war between the US and China persists and no progress in seen in resolving the dispute or at least ease its toll on the global - and thus European - economy then growth in Europe will struggle further. This will in turn mean that the ECB will grow further dovish and any fundamental catalysts in favor of the Euro will diminish. For the time being though, the Euro still holds just below the key 1.1480 area so if it manages to bounce higher again then we may see a continuation of recent gains towards 1.16, otherwise 1.14 seems like the next target.

Gold remains largely unchanged trading between $1,285 and $1,295 for yet another day, affected by the reduced demand for Dollars and limited risk aversion at this time. We believe that $1,280 is the medium-term floor for the yellow metal and eventually the bearish US Dollar should allow prices to retest the $1,300 ceiling and potentially break above it. Oil rallied to $53 on Friday but now takes a breath to correct a couple of Dollars lower; as long as prices remain above the $50 resistance-turned-support then further gains towards the $54 should be expected.

Equities had a bearish close for the week on Friday and this morning the fresh trade data from China provides a lackluster start of trading. The Asian markets are trading in the red and futures on both sides of the pond are pointing lower. The US shutdown is yet another negative catalyst for US equity traders that understand that troubles, domestically and abroad, are taking their toll on the US economy, hence the downbeat tone. Moreover, the earnings' season kicks off this week and it will be interesting to see whether it will provide a bullish boost to equities or frail corporate growth will be another headache for investors going forward.

MARKET EVENTS TO WATCH

  • Euro-Zone Industrial Production – 2pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research