Prepared by Jeff Halley, Senior Market Analyst
Markets rally on trade talk hopes
Wall Street looked to the future and not the past overnight, ignoring a lower than expected 4th quarter US GDP print, choosing instead to focus on possible concessions by China in the ongoing trade talks with the US. Apparent shifts by China on technology transfers and intellectual property saw the US dollar surge, stocks rise, and oil shrug off a President Trump-induced intraday sell-off. Bond yields rose and gold slumped in what turned out to be a trading-101 response to a potential positive growth news day.
The Dow Jones and S&P both rose 0.36%, and the Nasdaq jumped 0.34% setting up a potentially positive start for Asian trading. The dollar index rose a respectable 0.48% to 97.24 led by gains against the euro (EUR) and sterling (GBP) as US bond yields rose slightly.
Data highlights today include German unemployment this afternoon followed by one of the Federal Reserve’s favourite indicators, the US core personal consumption expenditure (PCE) numbers, however, it’s likely these will be swept along in the tide of the US-China trade talks. Although the markets should see a positive start in Asia, investor eyes will be glued to news feeds looking for any more details – rumoured or true – emerging from the talks. This could cause some abrupt intra-day volatility across the markets. On the same note, with negotiations continuing through the weekend, any news could make for a frisky start in Wellington’s notoriously illiquid opening session on Monday.
FX
The US dollar reigned supreme overnight with notable gains against the EUR, which fell to 1.1250, and the GBP, which tanked by 1.2%, falling from 1.3200 to 1.3035 on Brexit travails. Despite the noise, the GBP remains locked in its recent 1.3000/1.3300 range. With the global markets having long since taken a hard Brexit off the table, it’s difficult (although not impossible) to see a sustained GDP drop below 1.3000 in the near term.
The New Zealand dollar fell through 0.6800 overnight in a worrying technical development as the fall-out from the Reserve Bank of New Zealand rate decision continues.
The positive trade sentiment shown by the greenback overnight should continue into Asia where we would expect it to outperform against regional currencies today.
Equities
Wall Street’s trade-induced rally may turn out to be a case of where-hope-meets-reality, but near term, sentiment should see a bright start to Asian equities.
While the feel-good factor from China may see stock markets in the green, traders should exercise caution. Short-term sentiment will be highly vulnerable to headlines coming out of the talks, which could cause aggressive short-term volatility, bullish or bearish.
Oil
President Trump’s itchy Twitter trigger finger was back in action overnight. After the President tweeted OPEC should increase production, Brent and WTI quickly tanked by more than 1% each. The sell-off did not last though as trade sentiment saw both contracts regain their losses to finish flat for the session.
The bounce bank will cheer energy bulls even though oil will likely take a supporting role in Asian trading. Again, like equities, oil will be hypersensitive to any news coming from Beijing.
Gold
Gold slumped by 1.50% to USD1,290.50 an ounce overnight on resurgent risk appetite, rising bonds and a strong dollar. The precious metal slid through 1,300.00 as stale long positioning hit the sell button. Technically, gold’s key medium-term support lies in the 1,275.00/1,280.00 region.
