Wednesday, April 3, 2019

Progress in the Sino-US trade talks continues to boost risk sentiment

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

MORNING BRIEFING

Improved trade sentiment boosts risk assets for yet another day driving safe havens lower and Treasury yields higher as China and the US seem to have found enough common ground during their talks. According to the FT, the two sides have resolved most issues surrounding a trade agreement but have not yet decided what happens with existing tariffs on both sides. The Dollar saw reduced demand even though yields gained as investors continue to go risk-on, with the commodity dollars trending higher. Equities were mostly positive, Gold continues to tread water and Oil extended its rally to $63.

Risk assets are gaining at the start of the week on the back of the positive developments in the Sino-US trade talks. The Euro moved higher, the Yen dropped against the Dollar and the Australian and New Zealand currencies advanced as there seems to be light at the end of the tunnel. However, are these rallies sustainable? The Euro is a special case and given the sharp decline from the 1.14 area, a correction higher seems reasonable after the shared currency hit 1.12, which is considered a strong support.

Looking ahead though, we should expect a continuation of the sideways move between 1.12 and 1.14 as both the Fed and the ECB are expected to keep policies unchanged. Focusing on the short term, the price action today will depend on how the Eurozone retail sales and Services PMI reports print; with weakness expected in the consumer spending side, the 1.1250 mark appears as the near-term ceiling for the Euro.

The commodity dollars is another case altogether. Granted, an improvement in the global trade landscape will allow the export-dependent economies to perform better and that should be reflected on their domestic currencies. However, over the medium term, there's a different catalyst in play and this is the central banks' policy, which is now tilting to the more dovish side. Only yesterday, the RBA hinted on a potential rate cut this year to match the Fed's and ECB's biases, and with the markets now adjusting to this new guidance, the commodity dollars may struggle to gain much due to yield differentials. In any case, the short-term bias is positive so opportunities could arise.

Sterling is gaining once again as Theresa May is now rumored to have asked the Labor party for help in order to deliver Brexit. If a compromise can be found that will allow May's deal to be approved by the Commons then the Pound will skyrocket. Prices are hovering around the 1.3150 mark but if news regarding an agreement between the two parties leaks then the next stop will be at the 1.3250 level. A lack of support from Corbyn's side will complicate things though, as Theresa will be left with three choices: ask for a long delay blaming it on the Labor party's lack of cooperation, call for snap elections asking for a strong mandate to deliver her kind of Brexit or crash out of the EU. Apart from the first option, the other two sound quite scary for Sterling bulls.

Gold saw a mild pickup in demand over the past 24 hours on the back of Dollar's weakness. However, risk sentiment continues to improve which doesn't support the case for an extended recovery for the yellow metal in the near term. As long as prices remain below the $1,300 mark, we remain focused on the downside. Oil moved further to the upside yesterday, hitting the $63 mark, culminating an impressive rally from the $51 and $55 areas seen in February and March respectively. Exhaustion may become an issue at some point so, as said yesterday, a pullback soon wouldn't surprise us.

The stock markets closed in positive territory for the most part, with the EuroStoxx 50 notching a 0.3% advance while the US indices were mixed. In any case, the bullish sentiment persists and today's news in regards to the progress in the US-China trade talks helps improve risk appetite with Asia already trading in the green. Futures on both sides of the pond are pointing higher and we should see further gains in global equities over the course of the day.

MARKET EVENTS TO WATCH

  • UK Services PMI - 12.30pm
  • Euro-Zone Retail Sales - 1pm
  • US ISM Non-Manufacturing/Services PMI - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research