Monday, April 1, 2019

Risk sentiment improves at the start of the week as Chinese data points to strength

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

MORNING BRIEFING

Risk assets are poised to start the week on a positive note this morning on the back of a better—than-expected manufacturing report from China, which soothes investors' worries over a global slowdown. On Friday, Germany's retail sales report beat expectations while the US PCE data came in softer, allowing the Euro to catch its breath just above the 1.12 mark. The Dollar traded sideways during the final hours of the first quarter, supported by the rising UST yields and the risk-on sentiment this morning points towards more losses for the US currency, as investors now eye the Non-Farm Payrolls report on Friday. Equities ended the week above water, Gold tries to carve a bottom and Oil hit $60.50 again.

Investors' sentiment seems to be tilting to the side of optimism at the beginning of the second quarter, following a robust manufacturing report from China. This news helps ease market participants' worries over the odds of an upcoming recession on a global scale, even though there are plenty of signs suggesting caution. The ever widening divergence between US equity indices' performance and US 10-year Treasury yields creates an uncertain environment, where the disconnect between the two metrics is a clear sign of an upcoming market turn in one of the two asset classes.

Obviously, the recent and sustained rally in equities suggests a bullish sentiment among investors, that regard the US domestic economy as robust and view the recent dovish tilt in Fed's policy as a reason to continue buying stocks - a sentiment that should be reflected on other risk assets like high beta currencies ie. the Euro, the Pound and the commodity dollars. However, the decline in Treasury yields indicates that institutional investors are growing concerned over the longer term outlook of the US and global economies and seek refuge in bonds, the instrument of choice when looking for a safe haven. Clearly, these two trends cannot remain in place for a prolonged period in time, so investors need to be prepared for any sudden changes in direction.

Against this complicated macroeconomic backdrop, the Dollar starts the week a bit softer following the PCE inflation data on Friday and the risk-on tone coming from Asia. However, its price action going forward will be dictated by the fresh incoming figures from the States: retail sales data is pending for today along the manufacturing ISM, while Durable Goods Orders and non-manufacturing ISM are scheduled for release tomorrow and Wednesday. Expectations are mixed, if not skewed to the downside, so the downbeat tone for the greenback may persist during the early part of the week.

Sterling is seeing gains at the top of the morning as the British Parliament is about to take control of the Brexit process once again. Friday's vote on Theresa May's draft was yet another defeat for the British PM, while the voices calling for her to resign and call for snap elections are becoming louder. Today's Parliamentary process will include fresh votes on “alternative avenues” that are expected to be shot down so, barring a surprise that would include elections or a new referendum, the most likely scenario is that the Pound will be capped by the 1.3100-50 area again. Manufacturing PMI figures are due to be released as well and a bearish printing will not help Sterling extend its gains.

Gold saw a mild correction on Friday, testing the $1,300 level after the PCE inflation miss but is now trending lower again. Dollar's price action will be one of the catalysts dictating the yellow metal's direction so one would suppose that weakness from the greenback's side would prompt a rally for Gold. However, the other part of the argument says that with inflation expectations trending lower, investors are less prone to look for protection in Gold as a hedge against rising product prices. For the short-term, the path of least resistance points lower so we may see prices moving towards the $1,280 mark before a fresh leg higher is triggered. Oil posts fresh gains on the back of news over lower US drillers' activity and rising hedge funds' longs so we remain optimistic that $62 is achievable soon.

Global equities are poised to start the week in the ascendancy following a positive close on Friday and a bullish tone coming from Asia after the fresh Chinese manufacturing data hit the wires. Trade concerns appear to be receding somewhat and with the Asian giant showing good growth metrics, global stocks look bullish. Futures on both sides of the pond are pointing higher so we should be prepared for a positive opening bell at the start of the quarter.

MARKET EVENTS TO WATCH

  • UK PMI Manufacturing - 12.30pm
  • Euro-Zone Consumer Price Index Estimate- 1pm
  • US Retail Sales - 4.30pm
  • US ISM Manufacturing - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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