Markets continued to trade in a risk-on fashion yesterday following reports that China is willing to reduce tariffs on US autos, as well as Trump’s remarks that he would intervene in the Huawei case. The pound was once again the main loser among the G10s, following reports that Conservative MPs submitted the 48 letters needed to trigger a leadership challenge against PM May.
The dollar traded mixed against the other currencies on Tuesday. It gained against GBP, CHF, EUR, JPY and SEK in that order, while it underperformed against CAD, AUD and NZD. The greenback traded virtually unchanged versus SEK.
The G10 performance pattern suggests that risk appetite remained supported yesterday. Following news that Chinese and US officials have been in discussions in order to set a roadmap for future trade negotiations, a report hit the wires during the European morning noting that a proposal to reduce tariffs on imported autos from the US has been submitted to China’s Cabinet. According to the report, China is willing to cut tariffs back to 15% after raising them to 40% in order to respond to tariffs imposed by the US. This helped most major EU indices to end their trading in positive territory.
Market sentiment remained supported as the US session got underway, but eventually, US indices closed mixed. Only Nasdaq managed to hold onto its gains (+0.16%), while the Dow Jones ended 0.22% down. The S&P 500 closed virtually unchanged. This may have been due to US President Trump’s threats to shut down the government if his demands for funding the border between US and Mexico are not met.
That said, on Wednesday, Asian markets were a sea of green, with Japan’s Nikkei 225 and China’s Shanghai Composite Index closing 2.15% and 0.31% up respectively. Investor morale was lifted again after Trump confirmed that US and China have been in phone calls with regards to trade and that he would not proceed with the imposition of further tariffs until he is sure about an accord. He also said that he would intervene in the case against Huawei’s CFO if it would serve national security or bring the two nations closer to a trade deal. Talking about the Huawei case, yesterday, a Canadian court granted bail to the company’s CFO, adding another positive spin to the US-China saga.
As for our view, compared to yesterday’s reports of just phone calls, the proposal over the auto tariffs as well as the developments surrounding the Huawei case suggest some decent steps of progress. What’s more, Trump’s remarks with regards to fresh tariffs on Chinese imports were in a much softer tone than Lighthizer’s comments over the weekend. Thus, barring any headlines suggesting that tensions are flaring up again, we would expect risk sentiment to stay supported for a while more.
Since around mid-October, the S&P 500 has been trading in some choppy sideways activity, balancing around the year’s opening price near the 2674 level. It seems that the index might continue moving around that area and keep the intrigue up until the last trading day of this year. If to put it in other words, the S&P 500 is ranging now between roughly 2582 and 2821. Given that the index bounced off from its lows, but remains below the year’s opening price, we will take a more neutral stand and observe the price action.
A push above the year’s opening price could raise some interest in the bull-bloc again. This might lift the S&P 500 towards the next potential resistance zone at the 2695 hurdle, marked near the high of the 7th of December and the low of the 4th of the same month. If the buying activity doesn’t stop there, the price could rise to its next potential target at 2719, marked by the high of the 5th of December.
Alternatively, if the S&P 500 fails to move higher and drops again below the 2620 hurdle, marked by yesterday’s low, this could interest the bears again, as it could be a sign of weakness. This may also increase the chances for the index to pull itself lower towards the 2581 obstacle, a break of which might lead towards a test of the April low, which is near the 2552 level.
The pound was the worst performing G10 currency for the second consecutive day, with Cable trading briefly below 1.2500 for the first time since April 2017. Sterling lost the most ground against the commodity-linked currencies, which stood tall due to the positive headlines surrounding the US-China trade saga. It lost the least against the safe-havens CHF and JPY, as well as EUR, which may have been also driven by the same headlines as the pound.
Once again, it was all about Brexit. The British currency saw another wave of heavy selling yesterday following reports that Conservative MPs managed to complete the 48 letters needed to trigger a leadership challenge against Theresa May, perhaps as early as today. That said, the 48 letters do not guarantee that May is done as a PM. A majority among the 315 Conservative MPs would still need to vote against her.
On Monday, PM May called off a Parliamentary vote over Brexit, scheduled for Tuesday, in order to be able to renegotiate with the EU. However, EU officials have repeatedly made it clear that the existing deal is not negotiable, increasing the chances for May to return back home empty handed. Even if she secures some “reassurances” as media suggest, given the hostility she faces within the Parliament, we see the approval of the accord as unlikely. We repeat that we see May’s actions as kicking the can further down the road, with the increasing likelihood over a leadership challenge adding to the already elevated uncertainty surrounding UK politics. As we noted yesterday, uncertainty is not something investors like. Therefore, we expect the pound to remain under pressure, at least until the fog clears out.
Once again, the British currency got hit yesterday, which led to its depreciation against all of its major counterparts, with GBP/CAD being the pair that suffered the most. After the slide, the pair found good support near the 1.6710 zone. This is where the short-term upside support line is passing through, which also adds a bit of stability to the rate. Since touching that line, GBP/CAD has bounced and now is trying to recover some of its losses. This means that there could be a bit of correction to the upside. But we should note that the pair remains below a steep short-term downside line, which could hold for now, given the whole weakness that surrounds the British pound at the moment.
As we mentioned above, GBP/CAD is bouncing from its short-term upside line, which is currently providing some good support for the rate. There is a good chance to see a bit more recovery to the upside that could lead towards the 1.6758 hurdle, marked by the low of the 10th of December. If the rate acceleration continues, the pair might travel further up in order to test the 1.6804 obstacle and the aforementioned steep downside line at the same time. If the bulls won’t have enough power to overcome these two barriers, the bears could see this as a good opportunity to step in and push GBP/CAD back down towards the previously-mentioned upside support line for a re-test.
On the other hand, if the steep downside resistance line breaks and GBP/CAD breaks above the 1.6825 level, this could be a good sign for the buyers, as more of them could be joining in, in order to drive the pair back up again. A further move higher may lift GBP/USD to the 1.6900 area, a break of which could clear the way to the next potential resistance zone at 1.6953, marked by the yesterday’s high.
During the European morning, we get November inflation data from Sweden. Both the CPI and CPIF rates are anticipated to have declined to +2.0% yoy and +2.2% yoy from +2.3% and +2.4% respectively. That said, once again, we will pay more attention to the core CPIF metric, which excludes energy. At its latest policy gathering, the Riksbank maintained the view that interest rates will be raised either in December or February. Since then, October’s CPI data disappointed somewhat, with the core CPIF rate ticking down to +1.5% yoy from +1.6% yoy. Thus, another decline in this inflation metric could raise speculation that the Bank may refrain from hiking at its upcoming gathering, and instead note that interest rates could rise in February.
We get November CPIs from the US as well. The forecasts suggest that the headline CPI slowed to +2.2% yoy from +2.5%, but the core rate ticked up to +2.2% from +2.1%. The case for a slowdown in headline inflation and a tick up in the core rate is supported by the PPIs for the month. The headline PPI rate declined to +2.5% yoy from +2.9%, while the core rate ticked up to +2.7% yoy from +2.6%.
That said, even if the core CPI accelerates somewhat, we don’t expect something like that to change much expectations around the Fed’s future plans. Following the dovish remarks by Fed Chair Powell, the minutes from the latest FOMC meeting, and last week’s WSJ report which said that Fed officials are considering whether to adopt a wait-and-see approach after hiking at their next meeting, the market is nearly pricing only 1 hike throughout 2019. A few weeks ago, that number was around 2. Friday’s employment report did not help revive expectations for more hikes either.
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