Wall Street’s three-day rally came to an end overnight after Bloomberg reported any signing of the US-China trade deal would be delayed until April. The fact it wasn’t an official announcement likely explains the shallowness of the Wall Street pull back. As delays go, a couple of months is a minor irritation in the quest for macro-economic clarity, not a “deal-breaker.” Just ask the British after one centimetre of snow falls at Heathrow, or two years of Brexit negotiations. Now those are proper delays.
Speaking of delays, UK Prime Minister Theresa May finally won a vote in her own Parliament. The Commons backed her proposal for a yet another meaningful vote next Tuesday. The Faustian bargain being that if Parliament votes for the Brexit deal they voted down on Monday she will ask for a three-month extension. If they vote it down again, she will ask the European Union (EU) for a very long delay, possibly more than a year. Right now, a centimetre of snow at Heathrow is looking like a wonderful alternative.
Speaking of the EU, President Trump told the Irish Prime Minister Leo Varadkar on a visit to America, that the US could cause the EU “pretty severe” economic pain if the EU did not engage with the US on trade talks. It will no doubt take the froth of Varadkar’s upcoming St. Patrick’s Weekend but reinforces my previous point. Potential trade wars will not end with China. Trump’s tariff turret will swing towards Europe. Like many a general before him, he is not scared of fighting a war on two fronts.
Following on from poor China data yesterday, the trade story should have seen equities wobble quite badly, but stocks have proven remarkably resilient. The S&P fell 0.1%, the Dow Jones was flat, and the Nasdaq fell 0.16%. This likely means no news is good news, and the trade talks remain on track, even if the timing is not.
Looking ahead, Asia’s highlight today will be the Bank of Japan (BOJ) rate decision. No change is expected but given the global macro outlook and Japan’s recent run of poor data, we can possibly expect a more dovish stance in the text. We do not expect any actual policy changes. The BOJ is still in the middle of a full-blown quantitative easing (QE) programme of its own. It’s likely to adopt a wait-and-see attitude and let other central banks do the heavy lifting for now.
The US dollar strengthened modestly overnight as equities sank and bond yields rose after the Bloomberg trade story broke. The gains were modest however, reflecting the market’s disappointment there is still no deal, but we can take comfort in the fact that trade talks remain on track. The Australian dollar fell 50 points to 0.7050 reflecting its high beta to China, while the Euro fell only slightly to 1.1300. Sterling fell 90 points to 1.3240 in volatile trading as it gave back some Brexit-induced gains. The modest dollar strength should continue in Asia as regional currencies play catch-up to the falls in the majors overnight.
Short of a major surprise from the BOJ today, Asian equities should trade sideways on profit taking and weekend squaring of long positioning.
Oil held steady overnight even as the dollar rose. Brent crude saw profit-taking sellers and fell 0.58% to USD67.16. On the other hand, WTI rose 0.49% to USD58.54. Brent suffered on the potential trade talk delays while WTI remained firm on falling exports from Saudi Arabia and lower official inventories. We expect a sideways day for both contracts in Asian trading as energy markets await more trade clarity.
Gold fell USD12 to USD1,296.00 an ounce overnight as a higher dollar and rising US bond yields held the yellow metal below the waterline. The size and speed of the fall is somewhat concerning. This could imply that gold’s story is being dictated to by other markets moves and not by gold itself. Gold still has strong technical support at 1280.00 an ounce, and this is the critical level that must hold for gold bulls in the days ahead.
Foreign exchange transactions carry a high degree of risk and any transaction involving currencies was exposed to, among other things, changes in a country's political condition, economic climate, acts of nature - all of which may substantially affect the price or availability of a given currency. Speculative trading in the foreign exchange market is a challenging prospect with above average risk. You must therefore carefully consider your investment objectives, the level of experience and appetite for such risk before entering this market. Most importantly, do not invest money that you are not in a position to lose. Also, trading on a margin basis means that any market movement will have a proportionate effect on your deposited funds, this can work for you as well as against you. The possibility exists that you could sustain a total loss of initial margin funds. OANDA's trading system is designed to liquidate all open positions automatically if your margin deposit is in jeopardy so that you cannot lose more than the funds you have on deposit in your account. It is encouraged that you employ such risk-reducing strategies as 'stop-loss' or 'stop-limit' orders, but you should be aware that market conditions may make it impossible to close out your order at the level specified. There are also risks associated with utilizing an Internet-based trade execution software application including, but not limited to, the failure of hardware and software. OANDA maintains backup systems and contingency plans to minimize the possibility of system failure. Your Margin Account with OANDA was not insured under any state or federal insurance program, or by any other entity. In the event OANDA should become insolvent or file for protection under the bankruptcy laws, it is possible that you would lose the entire amount in your Margin Account. Please be sure to read our complete Risk Disclosure Statement and contact us if you have any questions or concerns.