Markets surge as traders choose hope over reality

With a tentative deal averting a US government shutdown reached and positive noise from the ongoing US-China trade talks, Wall Street surged more than 1.5% higher overnight. The US JOLTS job opening also posted much higher-than-expected gain to USD 7.335 million, adding fuel to the fire.

The positive backdrop saw investors rotating out of the USD bringing its eight-day rally to an end. We also saw gold and oil rise, buying a respite from the sell-off in G7 currencies as traders moved to more risk-seeking positions.

We would expect this theme to flow through to Asia’s markets today with regional currencies rallying and a positive tone for the local stock markets. One note of caution is that President Trump has not indicated whether he will accept the Republican/Democrat compromise. Experience should teach us predictability is not often associated with the President and should he say no, the global rally could come to an abrupt halt.

Locally, today’s data highlight will be the Reserve Bank of New Zealand (RBNZ) rate decision. Markets universally expect rates to remain unchanged at 1.75% (record lows), but the subsequent press conference will draw much attention. The street will be looking for signs of dovishness and this could put pressure on the New Zealand dollar.

This evening we have Euro-zone Industrial Production where we expect the poor run of data to continue, followed by the US CPI, with the street forecasting 2.1%. US Crude Inventory data finishes the night and will be closely monitored following Saudi Arabia’s announced of further production cuts overnight.

FX

The USD sold across the board overnight and we expect this to continue with regional currencies benefiting from the more risk-seeking environment.

The euro regained the 1.1300 level, rising to 1.1340 just below resistance at 1.1350. The GBP rose 50 points to 1.2895 but failed to recapture the 1.2900 level, which suggests the Brexit overhang will rightly crimp gains.

USD/JPY rose to 110.50 and – assuming no surprises on the trade front – its technical picture leaves it well placed in marching on to 111.50, its next significant resistance.

The NZD continues to tread water at the bottom of its range at 0.6740 following last week’s sell-off. A dovish RBNZ this morning could present a high-risk factor for the flightless bird.

Stocks

The Nikkei has risen 0.50% this morning following on from Wall Street’s gains. Regional markets should enjoy a positive day, but investors should beware of headlines coming out of the trade talks that could spark short-term direction volatility. The rally in stocks has been based on hope rather than any concrete agreements overnight.

Gold

Gold regained the 1,310.00 level overnight as the dollar fell. Trading remains muted with attention elsewhere in the markets, and gold continues to consolidate above 1,300.00 in the medium term.

Oil

Both Brent and WTI spiked higher overnight before settling up 1.70% on the day. Oil was boosted initially by a lower dollar and positive vibes from Beijing before Saudi Arabia announced it was cutting daily production and exports by a further 500,000 barrels per day on top of its agreed OPEC quota cut.

As refiners scramble to find heavy crude stocks to replace sanctions-hit Venezuelan oil, Saudi Arabia’s announcement sound very tactical by further squeezing supplies in the short term to push prices higher. For now, it seems to be working very nicely.