Central Banks Fail to Support Equities as Brexit Delay Fail to Boost Sterling

Open your FXTM account today

Equity markets across Asia are trading in red on Thursday as investors digest the latest updates on the global economic outlook and central banks decisions. ECB Chief Mario Draghi reiterated that risks to the Eurozone economy remain to the downside as the central bank pledged to keep interested rates at current levels at least through to the end of 2019. Minutes from the Federal Reserve’s March monetary policy meeting showed no indication of a rate cut, but several officials noted that next move may be in either direction.

The boost provided to equity markets from the shift in central banks seems to be exhausted with the S&P 500 standing 1.7% away from an all-time high. Investors hoping for an interest rate cut may not see one coming any time soon, suggesting that they shouldn’t continue betting on monetary policy to push equities further.

Investors need to shift their attention to the earnings season which unofficially kicks off tomorrow. With the impact of tax cuts and government spending boosts from 2018 fading, it’s time to see how companies will perform when left on their own. Earnings are estimated to decline by 4.2% in the first quarter of 2019 according to FactSet. However, if 65-70% of corporates, as usual, managed to beat Wall Street estimates, we may still see a slight growth in earnings.

One of the critical metrics investors need to watch is profit margins, especially given the spike in wage growth in Q1. If companies are not able to pass the additional cost to consumers, it may indicate further weaknesses to come in the upcoming quarters.

Guidance is also going to be critical for the S&P 500’s next move. The index has risen 15.2% so far year-to-date, and for the rally to be sustained, investors need assurance that we’re not going to hit an earnings recession. A dovish Fed won’t be enough to keep the party on.

Brexit delay failed to boost Sterling

A second Brexit delay has been granted until October 31 with a review to be conducted on June 30. The good news is a no-deal Brexit has been averted for now; the bad news is no one knows what will happen next. So far, it seems that the can is just being kicked further down the road. This has led to a steep decline in the Pound’s implied volatility but has done little to lift the currency. That’s because the risks have just been extended and not vanished. Predicting Sterling’s next move is going to be a tough task as all options remain open, including a no-deal Brexit and no Brexit at all.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

A busy Week Ahead for Financial Markets: Oil Spikes

Open your FXTM account today

Risk assets received a nice boost after the release of Friday’s US Non-Farm Payrolls report. The 196,000 jobs added in March exceeded market estimates of 180,000 and February’s figure was revised slightly upwards to 33,000 from 20,000. The added jobs are more than enough to keep the unemployment rate near its 50-year low if the momentum in the labor market is sustained over the coming months. However, this wasn’t the only piece of information that encouraged equity bulls. It was the wage growth which slowed down to 3.2% from February’s pace of 3.4%, which was the fastest in a decade. A strong headline figure along with weaker wage growth suggests two things. It confirms that the US remains in a growth mode, although it may be in a late cycle, and non-inflationary pressure will keep the Fed on hold, both of which are good ingredients for the bull market.

This week we’ll get to know more about why the Federal Reserve decided to pause on hiking rates in 2019. On Wednesday, the Fed will release the minutes from the March meeting, and probably the biggest question is: does the Fed know something that investors don’t know about? Markets are now expecting a 60% chance of a rate cut by year-end, and President Trump is seen pushing aggressively for lower rates. If inflationary pressures are headed lower, the Fed will probably consider Trump’s advice, but at this stage, there are no signs of a fall in prices.

The mood from the US-China trade talks continues to be positive although no deal has been achieved yet. Officials from both sides will resume negotiations this week in hopes of resolving outstanding issues and put an end to the trade disputes. However, markets have been pricing in a breakthrough for a couple of months, so a deal should be compelling enough to provide a further push to risk assets.

Investors will also keep a close eye on US earnings, with JP Morgan and Wells Fargo kicking off the season on Friday. According to FactSet, earnings are expected to decline 4.2% in Q1, which will mark the first year-over-year decline since Q2 2016. While this decline in earnings is already priced in, it’s the surprise factor and forward guidance that will lead Wall Street.

In commodity markets, Brent and WTI posted new highs for 2019. OPEC’s ongoing supply cuts and US sanctions on Iran and Venezuela have been the major driver of prices throughout this year. However, the latest boost was received from an escalation of fighting in Libya which is threatening further supply disruption. If output from Libya is reduced significantly in the upcoming days and OPEC does not act, we may see a further 5-10% surge in prices over the next two weeks.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Progress on US-China Trade Deal Sends S&P 500 to Six Month High

Open your FXTM account today

On Wednesday, the S&P 500 closed at highest level since October 9 amid hopes a trade deal between the U.S. and China could be near. According to a White House schedule, President Donald Trump is planning to meet with Chinese Vice Premier today, an indication that a potential signing summit may be announced by the Presidents of the two countries, once agreement has been achieved. If a trade deal is signed in the upcoming few weeks, a major source of uncertainty will be removed. Not just for the U.S. and Chinese economy, but the global economy.

While a trade deal will remove many of the hanging dark clouds, the question to many investors remain – what does it mean to financial markets? Looking at trading activity in early Asia trade, there doesn’t seem to be a lot of excitement.  Equities in Australia and Hong Kong dropped while Mainland Chinese stocks eked slight gains. Such a reaction suggests that lots of the positive news have been priced in, and for the momentum to regain strength, existing tariffs need to be lifted and encouraging economic data should begin to flow.

U.S. data on Wednesday showed service activity dropped to a 19-month low in March, and private jobs missed market expectations by 41,000 coming at 129,000. The U.S. Dollar declined slightly on the negative surprises, but many traders are still waiting for the big Non-farm payroll day on Friday. If the NFP is well below the 180,000 expected jobs, this is likely to provide a sell signal on the USD.

Sterling held on gains after the U.K.’s House of Commons passed a bill yesterday to block a no-deal Brexit. The Pound was also supported by talks held between Prime Minister Theresa May and opposition Labour party leader Jeremy Corbyn yesterday. If these conversations manage to deliver a soft-Brexit, we may see the Pound surging above 1.35.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Global Markets Kick off Q2 on a Positive Note

Open your FXTM account today

Investors have found fresh reasons to continue buying risk assets after a robust first quarter performance. A brighter manufacturing outlook from the world’s two largest economies, the U.S. and China, helped ease concerns about slowing global economic growth. China’s factory activity unexpectedly grew in March, at its fastest pace in eight months. The Caixin/Markit Manufacturing PMI entered an expansionary territory after being in contraction for three consecutive months. The government’s effort to ease monetary and fiscal policies seems to have started doing its magic; if more positive progress is achieved in Sino-U.S. trade talks, investors should expect further improvement in upcoming economic data.

The U.S. manufacturing sector also rebounded strongly in March from its lowest levels in more than two years, with new orders, employment, and production in the sector all surprising to the upside. The data has helped push U.S. stocks to their highest levels this year, whereas Treasury Bonds recorded their steepest selloff in three months, with yields on 10-Year Treasuries rising 8 basis points. The rise in long term yields led to steepening the yield curve after having inverted last week.

However, it’s still too early to conclude that the U.S. economy has made a U-turn. Retail sales dropped 0.2% last month as households reduced spending on furniture, electronics, building materials and clothing. Given that consumer spending accounts for more than two-thirds of U.S. economic activity, it’s necessary to see an improvement in spending habits to indicate that momentum has started to build up. Building up too much on one piece of information may be misleading, and that’s why investors need to be cautious, especially given that the Fed’s dovishness and a positive outcome to U.S.-China trade talks have already been priced in equity markets.

In currency markets, the British Pound saw the biggest moves on Monday. After rising to 1.3149 against the Dollar, the Pound plunged more than 1% to revisit 1.30 as four alternative Brexit options were all rejected in  Parliament. Yesterday’s defeat increased the probability of a no-Brexit deal with only 10 days remaining for U.K. politicians to make their minds up. Theresa May is likely to make another attempt to win support for her withdrawal agreement, but if she fails for the fourth time, an alternative plan is needed to avoid leaving without a deal. At this stage, it seems extending the Brexit timeline is the most probable scenario. However, if another round of indicative votes saw support for a customs union or a second referendum, we may see a significant rally in the Pound.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Another Central Bank Turns Dovish

Open your FXTM account today

The Reserve Bank of New Zealand (RBNZ) is the latest central bank to join the global trend of taking a U-turn. It was only last month when RBNZ Governor Adrian Orr said the risk of cutting rates hasn’t increased. His statement on February 13 sent the New Zealand Dollar rallying more than 1.5% as the central bank’s stance was seen as less dovish than markets anticipated.  Today the RBNZ kept the official cash rate unchanged at 1.75% but signaled that any new move would likely be downwards given the weaker global economic outlook and reduced momentum in domestic spending. The surprising dovish turn sent the New Zealand Dollar 1.6% lower at the time of writing to the lowest level since March 11.

The steep declines in U.S. Treasury Yields did not cause harm to the US Dollar. In fact, the Dollar Index has rallied 1.2% after testing a 1.5 month low on March 20. Failing to close last week below the 200-days moving average has encouraged more bulls to push the Greenback higher. Although the Federal Reserve has ruled out projections for any interest rate hikes this year, the Dollar still seems to be investors’ preferred currency amid signs of deteriorating global economic conditions.

The latest signs of a slowdown have come from China today, as industrial profits at large industrial companies fell 14% y-o-y in the first two months of 2019. Weaker manufacturing activity may introduce further fiscal and monetary policy stimulus measures, but for the sector to convincingly stabilize we need to see positive outcomes from the US-China trade talks.

Sterling was under slight pressure early Wednesday as traders await further clarity on the Brexit process with House of Commons due to vote on alternative plans to Theresa May’s proposal later today. All options seem to be back on the table, ranging from accepting Theresa May’s deal, longer Brexit delay, no-deal Brexit, or even a second Brexit referendum. That’s likely to lead to more volatile moves in Sterling which has moved in a tight range since the beginning of the week.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Sterling Recovers on Deadline Extension as Dollar Takes a U-turn

Open your FXTM account today

The EU has given UK Prime Minister Theresa May a final chance to pass her Brexit deal. She was offered a Brexit delay until May 22 under the condition of MPs approving the withdrawal deal. If no decision is taken by April 12, the remaining options will be a no-deal Brexit, a long extension, or revoking Article 50 according to European Council President Donald Tusk. The deadline extension provided a boost to Sterling, which recovered more than 100 pips from yesterday’s lows.

Despite the chances of exiting without a deal having risen significantly, traders do not believe that this is the base case scenario. Sterling remains the top performing major currency in 2019 and has been stuck in the range of 1.3 – 1.33 against the USD in March. The UK parliament may no longer kick the can further and should come up with a decision before April 12. This is likely to lead to volatile moves in the Pound, but it’s difficult to bet in one direction.

The Bank of England remained in a “wait and see” mode at yesterday’s monetary policy meeting. The MPC voted unanimously to keep interest rates at 0.75%, but Sterling benefited slightly as the central bank held the option of a gradual limited tightening in policy. However, all that matters now is what happens over the next two weeks. If chances of a no-Brexit deal increase, expect Sterling to trade significantly below 1.30.

The Dollar has little movement on Friday morning after a strong rebound yesterday. After dipping below the 200-days moving average, the DXY index recouped all losses from Wednesday’s session to trade near 96.4. While the steep declines in US Treasury Yields are not supportive to the US currency, bond yields elsewhere are also falling with the 10-Year German Bund Yields getting closer to 0%. The Greenback also received some support from better-than-expected data on Thursday with initial jobless claims, Philly Fed manufacturing survey and leading indicators all beating estimates.

The Euro will be in play today with a raft of key manufacturing and services PMI releases. German manufacturing PMI is likely to have the biggest impact on the single currency given the recent disappointment in manufacturing activity from the Euro’s largest economy.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Will The Fed Provide a Further Boost To Equities?

Open your FXTM account today

U.S. stocks posted their best weekly performance last week, sending the S&P 500 above the critical resistance level of 2,815. Equity bulls may see the break of the technical resistance as an indicator of further expected gains, especially given the CBOE’s Volatility Index “VIX” has fallen to its lowest level since October 2018. Two factors have driven equity investors’ optimism: hopes of a resolution in ongoing U.S.-China trade discussions and central banks’ pledge to keep supporting waning economies.

Bonds markets, however, seem to disagree. If the outlook is as rosy as equity investors suggest, yields on the long run of the Treasury Curve should have been climbing. Instead, U.S. 10-year yields have fallen below 2.6% for the first time since early January, suggesting that growth and inflation expectations will remain weak for the foreseeable future.

Another concern for the 3-month bull market is liquidity. The recent rally has not been supported by strong inflows, indicating that fewer investors are participating in this bull market. It remains to be seen whether equity or bond markets are right; however, it doesn’t seem this is the most loved bull market.

Will the Fed’s patience reflect in the dot plot?

The Federal Reserve’s monetary policy meeting is likely to be the most significant risk event for the week.

While it is not expected to see changes in interest rates, investors are hoping for an announcement to end the central bank’s balance sheet reduction. Such a move could prolong the recovery in equity markets.

According to Fed Fund Futures, markets do not just expect a zero chance of rising interest rates on Wednesday but are indicating a 26% chance of a rate cut by year-end. It will be interesting to see if the Fed agrees with current market views. If the dots on the dot plot are going to be dragged lower, this could attract new selling opportunities for the USD, but Powell’s tone and his assessment of the U.S. economy will also drive the currency.

Deal or no Deal?

The Bank of England is also meeting this week but this session is likely to be a non-event, with the central bank not expected to make any changes to policy. In fact, it’s the E.U. summit on March 21 – 22 that traders will need to keep an eye on. Will E.U. leaders agree on extending the Brexit deadline, or will they provide some further compromise before the March 29 deadline? If no agreement is reached at this summit, the U.K. will be left with one option. A no-deal Brexit!

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Is the Bull Market Under Threat?

Open your FXTM account today

It has been a decade since the bull market started back in March 2009. If you dared to invest back then in the US’s largest 500 companies, you would have earned more than 300% in returns by now. Ten years into this bull market, the main question now being asked, how much longer can it last?

The bull market has been supported by multiple factors, including steady global economic recovery, cheap money from central banks, record corporate profits and buybacks, and lastly came corporate tax reforms.

Predicting an end to the bull market has always proven a hard call. Bull markets do not expire as they age, but they also do not last forever. One factor that could lead to the end of a bull market is sentiment. When people become tremendously terrified about the economy’s performance, they begin to exit.

Last Friday’s US jobs data was the latest economic figure showing cracks in the world’s largest economy. Despite the unemployment rate dropping to 3.8% from 3.9%, and wage growth accelerating to 3.4% from 3.1% over the past 12 months, it was the headline number that took markets by surprise. The US economy added only 20,000 jobs in February versus estimates of 180,000. That’s a big shock and could certainly indicate the US labor market has reached its full capacity for the current economic cycle. Unless we see an upward revision in March’s reading, investors will become increasingly worried.

The poor jobs number came after a series of weak economic data from China and Europe, taking Citi’s economic surprise index deeply into the red.

Will Central Banks Intervene?

Central banks have already begun providing signals to intervene. On Thursday, the ECB followed the Federal Reserve’s steps by taking a U-turn in policy and reviving a stimulus programme to provide banks with new liquidity “TLTRO”. Interestingly though, the market’s reaction wasn’t positive, with all major European indices ending the day in red. This shows that central banks’ ability to prevent a slowing economy is weakening, given the limited tools currently available.

While central banks have been investors’ real friend throughout the past decade, it’s now more about how the economy performs in the coming months, and whether we see a significant recovery in the second half of 2019.

Brexit vote

Sterling is the currency to watch this week while traders await Tuesday’s vote on Theresa May’s Brexit deal with the EU. Passing the deal will be a big positive surprise to Sterling, but chances are too low. It seems the question is whether we get Brexit delayed or crash out on March 29 without a deal. So far a delayed Brexit is what’s mostly priced in, and any other scenario will lead to big moves.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

What to Expect From The ECB Meeting

Open your FXTM account today

Today’s European Central Bank policy meeting might be the most significant risk event of the week. Almost four years since the European Central Bank (ECB) launched its asset purchase program and spent €2.6 trillion, the Eurozone economy has failed to improve. Italy fell into a technical recession in 2018, Germany barely avoided one, core inflation in the Eurozone remained stuck at 1%, and most PMI surveys point towards more difficult times ahead.

Mario Draghi, who pledged to do “whatever it takes” to preserve the Euro, has seven months remaining at the helm of the ECB. With little time left until his tenure ends, he has a challenging task to face a global economic slowdown with limited available tools.

While it’s not expected to see changes to interest rates, it’s the economic projections, forward guidance and details of any round of multi-year loans that will be market-moving.

Given the latest streak of disappointing economic data, growth and inflation forecasts will likely be lowered. Although Draghi doesn’t expect a recession to hit the Eurozone, he believes the current slowdown could be longer than expected. A significant downgrade to economic projections may indicate that interest rates will not rise this summer, but given the different needs of the 19 Eurozone countries, the ECB might not commit to delaying a rate hike further.

While another QE program isn’t on the table, new multi-year loans to banks may be announced.  That’s likely to be the biggest risk for the Euro today. The previous four-year targeted long-term refinancing operations (TLTRO) begin to expire in mid-2020, which could lead to a significant tightening in lending. So, it’s becoming a question of when, not if, the ECB will launch a new lending scheme.

The details of a new TLTRO are what could lead to big moves in the Euro. Is it going to have similar maturities of four years or less? What are the limits? Is it going to be fixed or floating rate? If for example, the ECB launched a new TLTRO with shorter maturity and a variable interest rate, this would provide a signal that the central bank still wants to commit to raising rates by end of year, which could have a positive impact on the Euro. If the opposite is true and rates of the TLTRO are fixed, then that suggests interest rates will remain low, and thus drag the Euro lower.

It remains uncertain whether the ECB will announce full details of the program in today’s meeting, or even announce one at all. But given Europe’s current economic and political situation, the ECB needs to speed up such actions rather than wait until further deterioration, which could have severe consequences.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Chinese Equities Enter a Bull Market on Trade Optimism

What sounded like mission impossible a couple of months ago, now seems doable. President Trump announced late Sunday that he will delay the U.S. increase on Chinese tariffs which were scheduled for 1 March. He cited substantial progress in trade talks with China on substantial issues, including intellectual property protection, technology transfer, agriculture, services and currency. If negotiations continue to move in the right direction, President Trump expects to meet his Chinese counterpart at his Mar-a-Lago resort to conclude on an agreement.

The trade dispute has been a painful one for both countries and the world, especially since it occurred when the economic cycle [MS1] approached a peak. While China wants to prevent a hard landing, President Trump wants to fulfill one of his key campaign promises to correct the trade deficit. However, to support his re-election bid, Trump needs to avoid dragging down the U.S. economy and thus announce a deal, even though it might not look like a perfect one.

Equity markets in mainland China were the main beneficiaries of Trump’s announcement on extending the 1 March deadline. The blue-chip CSI 300 Index surged 4% today, hitting its highest level since June 2018; it has entered a bull market, rising more than 23% from January lows. The Chinese Yuan also strengthened 0.4%, reaching a 7-month high.

The improved appetite for risk has provided a boost for high beta currencies like the Australian and New Zealand Dollars, with both rising 0.3% during Asia trade. Elsewhere, the reaction has been muted, with the Euro, Pound and Yen moving in very tight ranges.

U.K. Prime Minister Theresa May’s decision to delay a parliamentary vote on her Brexit deal did little to move the Pound on Monday. The meaningful vote had been scheduled to take place on Wednesday, but according to May, the vote has now been postponed to 12 March. The chances of delaying Brexit are increasing day by day, with a recent report in the Telegraph indicating that May is considering delaying the process for up to two months. As long as the U.K. doesn’t crash out of the E.U. without a deal, the Pound is likely to continue holding near 1.30s in the near term.

While politicians continue to be the primary driver of financial markets, this week has no shortage of key economic data. After the U.S. data missed on retail sales, durable goods, existing home sales and a couple of other releases, Thursday will bring the reading on fourth-quarter GDP. Markets expect growth to have slowed down year-on-year, to 2.4% from 3.4% in the previous quarter. However, given the negative surprises received in past weeks, there’s also a chance to see a miss on GDP.  The Federal Reserve’s preferred measure of inflation, PCE, is also due to be released on Friday along with Personal Income data.

The article was written by Hussein Sayed, Chief Market Strategist at FXTM

Asian Equities Give Up Gains After Reaching a Four-Month High

Open your FXTM account today

After a muted session in Europe and the U.S. markets closed for Presidents’ Day, investors seem to be moved by news flows coming from U.S.- China trade negotiations. Asian stocks were near a four-month high today driven by Chinese and Australian markets, but gains were later surrendered after China accused the U.S. of fueling cybersecurity fears.

On the trade negotiations front, we have so far learned that China is willing to decrease its trade surplus with the U.S. by substantially increasing the number of goods and services it purchases. This sounds like good progress but it may not be enough to end the trade dispute. The crucial points remain on matters related to intellectual property, forced technology transfers and subsidies that China provides to its domestic firms. These issues are likely to be more complicated than just reducing the trade deficit and without a meaningful agreement, markets will not respond positively.

We still think there is a long way to go to end the current dispute. The most important component needed for any deal to be reached is trust. A memorandum of understanding without an enforcement mechanism may suggest that an achieved deal is weak and may break any time. The base case scenario is likely to be the extension of the 1 March deadline, to allow for more time to negotiate a meaningful deal.

While trade optimism encouraged risk-taking for several weeks, signals from central banks across the globe have played a more important factor in lifting risky assets, particularly from the Federal Reserve. On Wednesday, the FOMC Minutes will provide insight into whether the tightening cycle has come close to an end or we still need to expect further rate increases in 2019. More importantly, markets need to know whether the Fed is prepared to slow down or is likely to end the unwinding of its balance sheet.

Gold has rallied significantly since the beginning of the year rising 3.4%, a gain of more than 14% from August 2018 lows. The recent rally in Gold came despite a strong dollar, weak inflation expectations and a strong recovery in equities. This hasn’t been the case in the past. Gold used to have a negative correlation with the U.S. dollar and equity prices. The difference this time is that markets are beginning to anticipate a new round of quantitative easing, making the yellow metal the major beneficiary of central banks policies. The FOMC minutes tomorrow will further highlight whether we’re getting closer to a shift in policy.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors on the Sidelines Awaiting Trade Negotiations Outcome

Open your FXTM account today

Investors in Asia are sitting on the sidelines as they cautiously await the outcome of high-level trade talks between the U.S. and China. With the earnings season almost coming to an end, asset prices will begin to fluctuate on daily news headlines. So far, it seems we have more positive than negative news which may continue to support equities.

President Donald Trump is willing to extend the trade deal deadline if the two parties seem to be coming closer to a resolution. A good outcome from the expected meeting on Friday between China’s President Xi Jinping and his counterparts U.S. Treasury Secretary Steven Mnuchin and trade representative Robert Lighthizer may further prolong the rally in global equities.

Mr. Trump also intends to sign a U.S.-Mexico border security deal despite the fact he’s not happy with it. Any news on avoiding another shutdown is welcomed by the markets.

On the data front, U.S. consumer prices remained steady for a third straight month in January. Stable prices have led y-o-y CPI to grow at its slowest pace in one and a half years suggests that the Fed may keep interested rates on hold for some time if the economic outlook deteriorates further. However, the Dollar reacted positively to the data, given that when excluding the volatile components such as food and energy, the core-CPI stood at 2.2%. Such information may be conflicting in a sense that headline inflation doesn’t require further tightening in monetary policy, while core inflation indicates that we cannot rule out further hikes later this year.

Commodity currencies were the main beneficiaries of stronger than expected Chinese data earlier today. Chinese exports rebounded sharply in January rising 9.1% y-o-y beating consensus of a 3.2% decline by a wide margin.  Imports, while dropping by 1.5%, also showed much better than the expected 10% decline. The Australian Dollar and New Zealand Dollar were up 0.5% at the time of writing.

The Euro continued to struggle despite the improved appetite to risk. The single currency tested 1.1249 earlier today on the back of a series of disappointing data releases and political uncertainty. The latest political drama comes from Spain, which is heading into a snap election following a budget defeat. If a right-wing coalition takes over, expect to see more troubles ahead in the Eurozone. Other factors that contributed to Euro weakness include the continued plummeting of German Bond Yields. All maturities below 10-years are currently in negative territory, while 10-year yields are just 12 basis points above the zero line, compared to 2.7% in the U.S. All eyes are going to be on German GDP today to see if the country manages to escape a technical recession. Meanwhile, the Eurozone economy is expected to have grown 0.2% in Q4.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Deadlines are Fast Approaching

Open your FXTM account today

After a strong rally in risky assets since the beginning of 2019, anxiety and concerns over global economic growth have returned. This was evident in currency markets last week where inflows returned to the U.S. Dollar despite a dovish Fed. Equity markets in Europe hit a wall with the Stoxx 600 ending a five-week winning streak. Meanwhile, U.S. investors are becoming worried about fading profits and possibly an earnings recession.

A better gauge of economic and financial conditions is to look at what fixed-income markets are pricing. Japan’s 10-year bond yields have fallen below zero once again, the German 10-year Bunds yields are trading at their lowest level since October 2016, and U.S. 10-year yields are 19.3% below the peak reached in October. While it doesn’t necessarily mean a recession is near, fixed-income markets are indicating a significant slowdown in global economic growth.

This week is a big one for financial markets. The 90 days U.S.-China trade truce ends on March 1 and failing to reach an agreement by then could lead to more than double the current American tariffs on Chinese goods. According to a Wall Street Journal report, the two sides have not even drafted an accord that specifies where they agree and disagree. With U.S. trade representative and the Treasury Secretary headed to Beijing to kick-start a new round of trade talks in Beijing today, markets are anticipating some good news. This is reflected in Chinese equities which advanced today after a week-long national holiday. However, investors need to manage their expectations especially with conflicting messages from President Trump.

The clock is also ticking fast for the UK. With only 46 days remaining until Britain is scheduled to exit the EU, no one knows yet what will happen next and what version of Brexit will be achieved. This week, Prime Minister Theresa May needs to deliver a statement to Parliament on what progress has been accomplished and from what we know, nothing significant. Chances are high that MPs will file a motion to have greater control over the Brexit process and possibly extending the Article 50 deadline. A step closer to extending the deadline may see Sterling bouncing back above 1.32. On the data front, investors will keep a close eye on the UK’s final quarter GDP, and industrial production data due to be released later today.

We also have important data on the U.S. calendar this week. Inflation figures due to be released on Wednesday will provide further insight into whether the Fed’s judgment of the U.S. economy was accurate.  Retail sales is also another important piece of information, and we’ll get to see if the recent turmoil in equity markets has affected spending habits.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

U.S. Dollar on Six-Day Rally Streak

Open your FXTM account today

After a robust performance in 2018, the Dollar’s rally was expected to come under significant pressure going into 2019. Well, that may not be so true.

Factors that supported the U.S. currency last year were numerous, including robust economic expansion, fiscal stimulus which boosted yields in treasury markets, a hawkish Federal Reserve and fund repatriation by U.S. firms. None of these factors remain in play, and the Fed’s U-turn last week almost confirmed that monetary policy would no longer contribute to the Dollar’s strength.

The belief that global monetary policy would begin to converge with that of the U.S. was a key ingredient to the Dollar’s expected weakness. Surprisingly though, the U.S. Dollar has risen 0.70% against its major peers since the Fed turned extremely dovish on the 30th of January.

The Dollar’s strength over the past couple of days may not be justified by the Fed’s actions. However, when analyzing a currency’s exchange rate, it should be relative to a peer. So far it seems none of these peers have a competitive advantage, making the Dollar the less unloved currency.

Almost all central banks are admitting difficult times lie ahead. The latest was the Reserve Bank of Australia which surprised the markets yesterday when its Governor Philip Lowe opened the door for a rate cut. His comments crushed the Australian Dollar, sending it 1.8% lower against the USD, in its worst performance day since June 2016. Global risks were among the major factors that led to the shift in policy guidance.

Europe isn’t in a better place. Italy has already fallen into a technical recession. Germany may follow suit with its suffering auto industry, and France’s Yellow Vest demonstrations have dealt a significant blow to the country’s economy which had already been slowing. Thus, it shouldn’t be surprising to see investor sentiment in the Eurozone falling to its lowest level in more than four years.

The focus today will shift to the Bank of England meeting and the UK Quarterly Inflation report.  With 50 days remaining until the UK is due to leave EU, and President of the European Council Donald Tusk saying that Brexiters deserve “a special place in hell”, it doesn’t seem there’re signs the European Union is willing to compromise on a deal. This is probably the most challenging time for Bank of England Governor Mark Carney who is faced with a slowing economy, and risk of a disorderly Brexit. Given that policy won’t be expected to change anytime soon, its Carney’s tone and the outcome of UK Prime Minister May’s visit to Brussels today that will determine Sterling’s next move. At this stage, it seems the risks remain to the downside.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Did the Fed Make a Wrong Decision?

Open your FXTM account today

The U.S. Federal Reserve’s sharp U-turn last week has been welcomed by equity markets. The adjustment to guidance between December and January was enormous. After raising interest rates in December and hinting towards further gradual increases in interest rates while reducing the balance sheet on autopilot mode, the doves seem to have taken control.  The two rate hikes for 2019 are no longer on the table, and the balance sheet may be adjusted at any time.

The Fed justified the changes to guidance mainly because of external conditions. Among them were traded tensions, a weakening global economy, and risk of a hard Brexit. These are not the main factors the Fed has historically based its decisions upon. The central bank’s key objective is to foster economic conditions that promote stable prices and maximum sustainable employment.

Looking at Friday’s economic data, the U.S. economy still seems to be in good shape. Job growth in January blew expectations, with NFP surging by more than 300K. Although December’s figure was knocked lower, the three-month average is still significant at 241,000. These facts may indicate that the Fed has somewhat surrendered to market pressure and Trump’s criticism.

If the U.S. economy continues to perform well, the Fed has no choice but to return to gradual tightening, which may again lead to volatile markets.  However, one set of data may not be enough to judge upon.

It will be interesting to listen to Fed speakers this week including Fed Chair Jerome Powell, St Louis Fed President James Bullard, and Cleveland Fed President Loretta Mester. If they are not overwhelmed by recent data releases and remain aligned to their dovish stance, this may provide a further boost to equities.

The Bank of England is meeting on Thursday and will deliver its quarterly inflation report. We do not expect any changes to policy but may see slight changes in inflation and growth forecasts. The Pound is unlikely to move on changes to economic forecasts, as most traders remain focused on whether Prime Minister Theresa May will be successful in squeezing any compromises out of the EU regarding the Irish backstop.

The earning season remains in full swing this week with more than 100 S&P 500 firms due to release results. Despite 70% of S&P 500 companies so far managing to beat on the bottom line, more companies are issuing negative guidance than positive. According to FactSet, the S&P 500 is now projected to report a year-on-year decline in earnings for 2019. This will undoubtedly upset equity bulls.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Powell Gives Equity Bulls All They Need

Open your FXTM account today

Have we reached the end of the tightening cycle?

The Federal Reserve has taken a 180-degree turn. After raising interest rates four times in 2018, the Fed said it would be patient as it determines what future adjustments to the target range of the federal funds rate may be appropriate.

The key words here are ‘patient’ and ‘adjustment’. Patience suggests that the Fed might be done with tightening policy in the short run, meanwhile adjustment means interest rates may go either up or down.

Although markets have been anticipating a dovish Fed, what was delivered on Wednesday was beyond expectations. As a result, the Dow Jones Industrial Average surged 435 points, the yield curve steepened, and the Dollar fell against its major peers.

Key changes to the Fed statement

In addition to the patience approach, the Fed is no longer on autopilot mode for reducing its balance sheet. The central bank stated that it is now prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.

Although the Fed continues to see economic activity remaining healthy, it has downgraded its overall assessment of economic activity from ‘strong’ to ‘solid’.

Green light to take a risk?

From an equity valuation perspective, the required rate of return has been pulled lower for now, suggesting that further gains may be in the cards. However, this component is not enough to provide a sustainable rally to equity markets. A weakening global economy, the U.S.-China trade conflict, Brexit, and other geopolitical factors will continue to challenge risk appetite.

In short, the shift taken by the Fed is of great relief to equity bulls, but other factors need to be resolved in order for the bull market to be sustained.

Gold shines again

A dovish Fed, lower bond yields and a weaker Dollar are key ingredients for higher gold prices. However, it seems the yellow metal is also seeing a boost from central bank purchases. In its most recent report, the World Gold Council stated that central banks added 651.5 tons to official gold reserves in 2018, creating the second highest annual total on record. If this trend is expected to continue in 2019, the chances of retesting the 2016 peak of $1,375 is highly likely in the coming two months.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

A Busy Week Ahead for Financial Markets

Open your FXTM account today

The longest government shutdown in US history is finally over “at least temporarily” after President Trump announced the reopening of the government for three weeks hoping that the Democrats and Republicans will reach a deal to fund the border wall. Markets were barely moved by the news.

The annual meeting of the World Economic Forum in Davos did not achieve any breaking headlines, especially that Trump and Xi Jinping was absent. No answers were provided on what will happen next in the US-China trade war, or on what terms the UK will divorce from the EU. All we got was a downgrade to the global economy from the IMF, which has already been priced in financial markets.

This week is certainly going to be more meaningful, with the Federal Reserve’s first meeting of the year, US and China returning to the negotiation table, another meaningful vote on Brexit, US big tech earnings announcements, and top tier economic data.

Will the Fed continue supporting the bulls?

The Federal Reserve will conclude its two-day meeting on Wednesday. Investors will be focusing on whether the tightening policy pauses. Given that many economic data were not released due to the shutdown, it might be hard to assess how the US economy has performed. Another factor that’s likely to contribute to Fed caution is a no guarantee of US and China reaching a trade deal prior to the March 1 deadline. While policymakers will not update their economic projections, going forward every meeting will be followed by a press conference by Fed Chair Jerome Powell. If the term ‘patience’ appears again, it would suggest no rate hike will occur in the first quarter, maybe not even in the first six months of 2019. This is likely to be good for equities but may hurt the US dollar.

Deal or no Deal?

US and China are returning to the negotiating table this week in an attempt to end the ongoing trade war. Vice Premier Liu He will meet his US counterpart Trade Representative Robert Lighthizer on 30 and 31 January. While we do not expect a final deal to be drafted this week, all investors are hoping for is the meeting to end with a big smile on both faces, followed by statements indicating great progress has been achieved.  If no statements were to follow the meeting, keep an eye on Trump’s Twitter account that will likely reveal the outcome. A positive outcome will remove one of the biggest obstacles preventing risk taking.

Brexit Plan B

Sterling has rallied significantly over the past several days on optimism that a no-deal scenario will be averted. The “Plan B” which might look a lot like “Plan A” will be debated in Parliament on 29 January, and maybe voted on later on the same day. Labour leader Jeremy Corbyn has refused to participate in talks that do not take the ‘no deal’ scenario off the table. While Mrs. May is not likely to include such an amendment, the most realistic outcome is to seek an extension for Article 50.

US Earnings

It’s going to be a busy week on the earnings front with Apple, Facebook, Microsoft, Amazon, Tesla and many other techs and industrial firms releasing their Q4 results. The tech sector which makes up more than a quarter of the S&P 500 market cap will likely determine the US equities direction.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Markets Struggle for Direction Amidst Conflicting Data

Open your FXTM account today

After a sharp recovery from their December lows, global equity markets are struggling for the direction this week. If you’re in the bullish camp, the U.S. earning season may support your views. The Dow Jones Industrial Average rose 171 points yesterday driven by surprise positive earnings from United Technologies, IBM, and Procter & Gamble. Whether this trend of positive surprises continues to remains in question, but it’s likely that the Tech sector, which makes up more than a quarter of the S&P 500 market cap, will dictate the fate of U.S. equities.

If you are on the other side of the camp, there is a lot of news supporting bearish views. Slowing global economic growth, the unresolved U.S.-China trade conflict, the U.S. government shutdown, and Brexit drama are all sources of uncertainty dragging at sentiment.

Eventually one camp will win, but there isn’t sufficient momentum on either side. This will likely lead markets to continue to be driven by daily news flows until one factor dominates. However, expect to see further moves of more than 1% up or down in the near future.

ECB Meeting

The European Central Bank meets today for what is likely to be the week’s most significant risk event.  Most of last year’s focus was on how to shift from monetary easing to tightening. Back then it was expected that the European economy would be in better shape in the following years. However, the latest updates from the IMF shows that Europe may be under more pressure than the rest of the world. Recent economic data confirm such views with PMI’s, sentiment surveys, inflation, and other wide sets of economic figures pointing south. Will ECB President Mario Draghi acknowledge the darkening clouds today? Moreover, what tools the central bank will use to offset the slowdown will determine the Euro’s direction. Lowering growth and inflation projections may provide a sell signal to the Euro, but Draghi’s speech today may have even more impact on the single currency.

Sterling soars after breaking above 1.30

Sterling saw its best daily performance since December 12 on Wednesday, rising 0.85% against the dollar, and has been the best performing major currency so far in 2019. The surge in the Pound was driven by beliefs that a no-deal Brexit will eventually be avoided and the chances of extending Article 50 look more likely. Although extending Article 50 doesn’t mean a final solution to Brexit has been found, any news delaying the process and supporting avoiding a hard Brexit will be supportive of the Pound. If no negative surprises materialize, the currency may find further support on technical buying after GBPUSD broke above the 200-day moving average.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Equities higher as China GDP slows

Open your FXTM account today

Investor appetite to risk remains on the rise today, with equities in green across Asian markets. The slowdown in China’s economy will not impact this sentiment much unless a negative update on U.S.– China trade negotiations is received. Although U.S. President Donald Trump denied reports indicating that U.S. tariffs on Chinese exports would be lifted, he said over the weekend that there has been progressing towards a deal with China. Despite the complex situation, it seems markets are tending to believe that negotiations are moving in the right direction and this is likely to provide further support to risk sentiment.

The release of Chinese GDP figures, which showed the economy has grown at its slowest pace in almost three decades, was not a surprise and this has been factored into asset prices. Fourth quarter GDP growth came in at 6.4% while full 2018 growth of 6.6% was slightly above Beijing’s target. U.S. trade tariffs have yet to deal direct significant impact on the country’s growth, however, the ongoing trade dispute is leading to a further slowing in consumer consumption and business capital expenditures. While China may continue to use its monetary and fiscal tools to offset the damage done by the trade conflict, there’s a limit on how much China may loosen policy given the swelling of its debt. It seems the only way for China to prevent a hard landing is to reach a deal with the U.S, and that’s what the markets are hoping for.

Theresa May Plan B

UK Prime Minister Theresa May will unveil her Brexit “Plan B” to parliament later today after MPs rejected her initial “Plan A”. Her alternative plan is unlikely to differ much from the initial one and in the absence of any new information, the UK may crash out of the EU on March 29. No one knows what will happen next, but the chances of a second referendum seem to be on the rise, as is an early general election. Traders need to be prepared for various outcomes, so expect Sterling moves to become more volatile in the days ahead.

Central Bank Meetings

The European Central Bank and Bank of Japan are both due to meet this week. No policy changes are expected from either, however updated guidance from ECB will move the Euro. Core Euro countries are experiencing sharp slowdowns. Germany and Italy may already be in a technical recession, and this is occurring as ECB ends its asset purchase program. The darkening economic outlook may put pressure on the ECB to keep interest rates at their current level for an extended period. If this is indeed the message from the ECB, the Euro may retest 2018 lows of around 1.12.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

U.S. Earnings, May’s Survival & China’s Stimulus Extends Bullish Correction

Open your FXTM account today

A solid kick off for the U.S. earnings season, Theresa May surviving a vote of no-confidence, China’s central bank pumping record liquidity, and policymaker assurances to take the right actions were all key factors in supporting risk in financial markets and keeping equity bulls in charge.

Upbeat U.S. bank earnings boosted investors’ confidence this week. Goldman Sachs was up 9.5% on Wednesday after beating estimates by a wide margin on both top line and bottom line. Yesterday’s surge in its stock was the best reaction to earnings results in a decade. Bank of America also crushed expectations and ended the day 7.2% higher. The numbers released so far from U.S. banks managed to ease some concerns on the economy. However, confirmation is still needed from other sectors – mainly the cyclical ones – to provide better guidance on how consumers are behaving, which is critical to future earnings.

Prime Minister Theresa May’s government survived a no-confidence vote yesterday, just one day after her humiliating Brexit defeat. This result seemed to have been properly priced into the Pound given the slight reaction to the news. A snap general election appears to be out of the equation now, but there is still a high probability of a second referendum taking place. Although a soft Brexit remains to be the most likely scenario, it’s a tough call to make. Expect an extension of Article 50 to provide a further boost to the Pound, but if May starts to open up to the idea of a second referendum, Sterling may easily jump above 1.30.

Additional stimulus from China also managed to boost sentiment. After cutting taxes in response to disappointing industrial production figures and falling exports, monetary authorities injected a record $84 billion into the country’s banking system. Such actions indicate that China will continue to use all available tools to reduce the impact from ongoing trade tensions with the U.S. However, this will only have a short-term impact on markets and only some sort of agreement with the U.S. to end the current trade tensions will provide a sustainable positive influence.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.