Risk Aversion Remains at the Start of the Week

Could strong retail sales report prompt more selling?

Markets remain in risk aversion mode at the start of the week, with losses being recorded across Asia and Europe and US futures pointing to a similar session on Wall Street.

While the losses being reported are more modest that those seen last week, which investors will hope represents some stability and normality returning to markets, it will remain a source of concern for now. Underlying risks in the markets remain plentiful, from Sino-US trade to Brexit, Italy’s budget spat and now German political concerns following state elections in Bavaria.

While investors will primarily be focused on the numerous political stories and related risks, US earnings season which kicked off on Friday will provide a welcome distraction over the coming weeks. We’ll also get US retail sales data on Monday which will be followed closely given investor anxiety about the prospect of higher interest rates and the pace that US yields are rising in anticipation of this. In these unsettled markets, a strong reading could actually have a negative impact if it prompts a further selling of Treasuries and another rise in yields.

Brexit talks heading for 11th hour fudge as crunch talks fail

Crunch talks in Brussels over the weekend lasting only an hour failed to produce a deal on the Northern Ireland border backstop that remains the main blocker to an agreement between the UK and EU. It was hoped that a compromise could be found ahead of the EU summit later this week but it’s looking increasingly like being an eleventh hour fudge, which won’t surprise anyone who’s followed these talks for the last year and a half.

The pound is holding up relatively well despite the stalled progress over the weekend. The currency is likely to remain rather volatile over the coming weeks as talks continue and we see increasing amounts of commentary being leaked, not to mention more pressure on the May following reports that more letters of no confidence being submitted, taking the total number to 44, four short of the number required to trigger a vote.  

Oil breaks with last week’s trend on Saudi fears

Oil is trading higher at the start of the week, breaking with the trend towards the back end of last of being dragged lower along with overall risk appetite on growth concerns, following an heating up in rhetoric from the US and others towards Saudi Arabia over the weekend after the disappearance of journalist Jamal Khashoggi.

Saudi Arabia denies behind the disappearance and alleged murder and vowed to retaliate to any sanctions or pressure from other countries. This makes oil traders very nervous given that Saudi Arabia is among the world’s largest producers and could use this as a tool against other governments, at a time when prices are already inflated and rising due to tighter supply on the back of years or coordinated cuts and more recently, Iranian sanctions.