A rally to safety is the key takeaway from the current market action across currencies and equities, with safe havens raking in more gains and stock indices breaking major support levels. The deterioration in the trade dispute between the US and China, on the back of the latter's threat to reduce or restrict rare-earth exports, further raises the stakes in this spat. The Dollar gained across the board again, putting more pressure on the high beta currencies, while also supported by the pullback in Treasury yields. Equities were deep in the red, Gold failed to pick up pace and Oil recovers to $59 after dropping $2 lower in the interim.
The greenback extended its move to the upside against a risk averse backdrop with the likes of the Euro and the Pound losing more ground. The US currency seems to have one more reason to over-perform its peers this week as the 10-year UST yields seem to have hit a near-term bottom and try to push higher. However, the focus for the Dollar bulls is now tilting on the fresh US data to be released over the next couple of days: the GDP and inflation figures have the potential to either propel the currency to new highs or cut its rally short.
The action kicks off with the Gross Domestic Product figures, pending for release today, and the report will be closely monitored for clues on how the domestic economy is faring. Keep in mind that last time around the data showed an impressive 3.2% increase, which was a reason for equities and the Dollar to rally. Market participants were happy to see that growth in the US economy was still ticking higher, doing away with worries about an upcoming recession. However, the bond markets didn't exactly join the party and the reason was that the report included a few sore spots underneath the surface.
The majority of the contribution to the rather impressive 3.2% reading came from net exports plus government spending and inventory build ups. These are worrying signs pointing towards an economy that is still growing, albeit at a decelerating pace. No wonder the yield on the benchmark 10-year Treasuries that was around the 2.5% level at the time has dropped all the way to the current 2.27% mark. As such, today's GDP report needs to come in at least around the 3% level, otherwise the Dollar will be in trouble.
Dollar/Yen is trading at 109.70 this morning and depending on how the GDP figures print we should see more gains - in case of a positive reading - or another push lower towards the 109.20 area in case of a sudden miss. Elsewhere, the Euro stays on its downwards trajectory and our call for the 1.1120 lows being tested remains pertinent, while Sterling also looks poised to reach 1.26. Keep in mind that a surprisingly bearish set of figures from the Dollar's side today may trigger a relief rally on both European currencies in the near term but, even in this case, our outlook will remain unchanged in favor of more downside.
Gold had quite a volatile day yesterday, initially climbing to the $1,285 area only to reverse and trade back to the $1,277 mark. This type of price action indicates that the Dollar bulls are not willing to allow Gold to move to the upside, despite a host of positive fundamental catalysts. Should the US GDP data print in a satisfactory manner, the yellow metal will push lower with the $1,270 lows coming into focus. Oil portrays the opposite bias, with prices hitting $57 over the past 24 hours only to reverse and trade to $59 this morning; this indicates the existence of a positive bias among investors and a successful break above this level points towards the $60.50 area.
Finally, equities retreated again and closed with strong losses in Europe and the US. The EuroStoxx 50 was down 1.5% while the Dow Jones closed with a 0.87% decline. Stock traders are worried over China's threat to restrict rare-earth exports which, should it happen, will take quite a toll on electronics and defense goods' manufacturers. This morning, equity futures on either side of the pond point marginally higher with all eyes on the US GDP figures. A strong reading will sooth investors' worries at this time and could fuel a short-term recovery but a miss will be a nightmare for equities with hefty losses expected.
MARKET EVENTS TO WATCH
- US Gross Domestic Product - 4.30
- US Advance Goods Trade Balance - 4.30pm
- U.S. Crude Oil Inventories - 7pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research