Risk Appetite Rebounds Lifting Wall Street, Euro & EM’s

A combination of bullish earnings from Walmart, the continued strengthening of the Turkish Lira and new trade talks between China and the US boosted Wall Street overnight. The Dow posted its biggest one-day gain in months as investors put risk back on the table.

The Dow finished almost 400 points higher, the S&P rallied 0.8% taking it back within sight of January’s record high and the Nasdaq increased 0.4% taking it closer to its own record high.

US – Chinese Trade Talks to Begin Again

News that a trade delegation from China will visit Washington for trade talks boosted sentiment. This will be the first set of trade talks since an apparent deal fell apart months ago. However, the impact could be short-lived, given that there are no senior officials involved., demonstrating that China is not convinced that any serious progress is expected from these talks. So, whilst this could look like a step in the right direction, low-level officials are unlikely to resolve this ongoing trade dispute.

Whilst the Chinese equity market was rather unimpressed when the news broke on Thursday, falling 0.6% lower to just shy of its recent 2 ½ year low; it recovered on Friday, helped also by increased flows into Emerging Markets amid the continued recovery of the Turkish Lira.

Lira Continues to Rebound

The Lira staging a recovery of almost 25% since its nadir of 7.24 hit on Monday, despite the US announcing further sanctions has boosted confidence in EM currencies. With Qatar propping up Turkey to the tune of $15 billion, market fears over the crisis in Turkey and contagion to European banks have eased considerably. As risk on sentiment prevails the euro has picked itself up off 13-month lows with euro traders now looking ahead to inflation data due this morning.

Pound Struggles on Brexit Fears

The pound has not been able to capitalise so convincingly on the softer dollar, as Brexit fears keep the pressure on sterling. Despite reasonable data over the past few days, with inflation ticking higher and retail sales booming the pound is still down 0.4% across the week. This is because even data showing that the UK economy is relatively healthy has failed to distract traders’ attention away from Brexit fears, as negotiations are once again in full swing. Traders will be watching keenly for any headlines indicating the likelihood of the UK crashing out of Europe without a deal. Rating agencies, which had previously considered an orderly Brexit as the base case scenario are no longer willing to do so, highlighting the extent of the risk the UK now faces.