Monday, April 15, 2019

US earnings drive investors' sentiment higher, will risk assets continue to rally?

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

MORNING BRIEFING

The risk on sentiment is the key theme in the markets at the start of the week after a strong close for most instruments on Friday. High beta currencies gained across the board, equities rallied, Treasury yields moved higher and Gold retreated. This a typical risk on environment and it begs the question whether investors are right to be so cheerful. In any case, Easter price action is just around the corner and with the US earnings' season in full swing more volatility is expected to keep market participants on their toes.

An improvement in risk sentiment is what seems to drive investors' appetite at this stage. The Euro, the commodity dollars, the greenback against the Yen, all rallied on Friday. At the same time, Gold moved lower while equities were pushing towards more gains targeting fresh highs for the year. However, what makes sense to mention here is that the only meaningful catalyst behind this move higher was that banks reported better earnings for Q1, which sound too simplistic as a credible market driver. Should we be worried?

Truth be told, we've received more bearish than bullish signals in regards to global growth in the past couple of months so we'd be a bit more cautious at this stage. Investors' sentiment does drive the markets in the short term but we shouldn't drop our guard as we may see a swift reversal soon in specific instruments. For example, the Euro is trading above 1.13 this morning but the Eurozone ZEW Survey due tomorrow may spoil the party for the shared currency. A break below 1.1280 would signal the end of the recent rally and prices may travel all the way to 1.12 soon.

Dollar/Yen sits around 112 at the start of the week as the performance of the US equity markets continues to drive positive flows into the currency pair. Given that earnings' releases are expected to continue printing in an encouraging fashion, more gains could be seen. The next area of interest is found around the 112.50 level and a further continuation could drive prices towards 113, especially with analysts expecting a strong rebound in retail sales, pending for release on Thursday.

Gold remains subdued below $1,300 and the momentum does point lower, amid fewer geopolitical risks and an improvement in risk appetite. Currently, the yellow metal's retreat has taken prices to the $1,288 level and a continuation of the decline points towards the $1,281 level. Oil consolidates for the past 4 days and the exit from this formation will show us what's next in the short term: a break below $63 will expose the $61.50 area while a fresh leg higher will bring the $65 mark back into focus.

Global equities ended last week in the green and the US earnings' season has kicked off in a positive manner. JP Morgan's better than expected results are stoking hopes for a robust season for the banking sector, which may be just what the US indices need to break into record highs. This morning, futures in Europe and the US are pointing higher while the Asian markets have already opened in the green. Needless to say, the US earnings will remain the main focus with investors currently focused on the upside.

MARKET EVENTS TO WATCH

  • BOE's Haskel Speaks on Panel in Warwick - 8pm
  • Fed's Evans Discusses Economy and Monetary Policy - 9pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research