US – China trade negotiations are still one of the main topics this week. With the ongoing talks, markets are keeping a close eye on the progress. So far, the news is coming out positive, as both countries are willing to reach some sort of a deal. UK House of Commons voted to force Theresa May to seek an extension, in order to avoid a no-deal Brexit.
Last year, the world’s two largest economies started imposing import tariffs on each other’s goods. The US kicked off the game first, but it didn’t take long for China to respond with counter-tariffs on US exports to China. It is now getting closer to a year since the battle started. Both countries continue to damage each other’s domestic exporters this way. One of the main ones that were hit on the US side were the soybean farmers, as their produce is in high demand in China. The beans are heavily used in feeding cattle and without a balanced level of it, the Chinese meat industry would not be able to maintain their consumer demands. One of the main Chinese exporting sectors that were hit by US tariffs was technology. Not only that the Chinese manufacturers are experiencing bigger problems in exporting their goods to the US, but some well-known tech giants also are facing obstacles in importing key parts, as the main production of those sits in China. So we can see how both countries need to sort out this ongoing debate as soon as possible, otherwise the consequences could be even worse.
Recently, the IMF came out with a warning that if the deal between China and the US is not reached, there could be more negative effects on their industries. There might be a rise in a shift of manufacturing away from those countries, which could cause unemployment to rise. The production could move to both Canada and Mexico on the North American continent, and other East Asian states could attract the Chinese manufacturing on the Asian continent.
Both, China and the US, understand the consequences and that is why they are finally pushing strongly towards reaching an agreement. The White House economic adviser, Larry Kudlow, said that yesterday’s talks between the Chinese Vice-Premiere Liu He, the US Trade Representative Robert Lighthizer and the Treasury Secretary Steven Mnuchin went quite well. Kudlow also added that China acknowledged that there are problems with intellectual property theft and hacking, but the issue surrounding the Chinese telecommunication giant, Huawei, did not come up.
The US markets closed in the positive territory yesterday, as good news from the trade talks have weighed in. But because investors still have some element of the doubt, the gains were not significant.
Looking at our Nasdaq 100 cash index on the 4-hour chart, we can see that the buyers are still trying to push the index further up. Yesterday, the price broke its key resistance level at around 7514 and closed the trading day slightly in the positive territory. Given the positive remarks coming out the US-China negotiations room, investor might continue seeing good opportunities surrounding the equity markets. However, investors also understand that if the talks start finding obstacles again, the indices might turn south. For now, even though we may see a move lower on Nasdaq 100 cash index, we will class that as a temporary correction before another leg of buying.
If the 7514 area gets tested again, but it won’t allow the index fall below it, this could be a good opportunity for the buyers to step in again and lift the price to yesterday’s high, near the 7590 barrier. A break of it could open the door top Nasdaq’s next potential resistance zone, at 7671, or even lead to it all-time high, at around 7702.
Alternatively, we will take a more neutral stance if the price falls below the 7514 hurdle. But, if the index continues to slide and moves below the 7483 support zone, marked near the high of Monday and near the low of yesterday, this could increase the chances of seeing a further decline. The important obstacle on the way down could be around the 7420 zone, a break of which could lead Nasdaq 100 to test the 7376 level, marked by the intraday swing high of March 29th.
On the isles of Great Britain, the Brexit talks and votes continue. Yesterday, UK MP’s from the House of Commons have once again voted and this time to force Theresa May to ask EU for another extension. The bill passed by only one vote, which would require to seek a delay in UK’s departure in order to avoid a no-deal outcome. That said, the bill will need the House of Lords to approve it, in order for it to become a law. But even then, the EU will have the last say in all this, if they will be willing to grant EU the extension.
But before the vote took place, Theresa May met up with the opposition leader, Jeremy Corbyn, in order to have a constructive discussion about her deal. In a way, some lawmakers saw it as May not standing her ground by trying to find a compromise with Jeremy Corbyn. Two ministers protested by resigning from their positions.
The EU has given the UK up until April 12th to come up with a solution to pass the deal through parliament in order to get an extension past April 12th. The EU is holding an emergency Brexit summit on April 10th, which will be heavily monitored by investors as well.
Yesterday, GBP/CAD managed to climb above its key resistance level at 1.7562, this way potentially clearing the path towards some higher areas, as the pair continues to rise this week. That said, the Brexit headwinds remain, and the British pound pairs might still be headline driven, hence why we will stay cautiously-bullish for now.
Given that GBP/CAD had gained already quite a bit, we may see a small correction to the downside first before another leg of buying. The pair might slide back to the 1.7562 hurdle, to test it from above and if it holds the rate from falling, the bulls could see it as a good opportunity to step in and drive GBP/CAD higher again. We will then examine the possibility of seeing the 1.7634 obstacle getting tested, a break of which could open the door to the 1.7716 barrier, marked by the intraday swing high of March 26th and also by the highs of March 7th and 19th.
On the other hand, a drop below the 1.7562 hurdle could raise concerns over the short-term upside potential. But we could turn our heads south if we see a break below the 1.7485 zone, marked by the low of yesterday. This way, the rate may slide further towards the 1.7426 obstacle, which if broken could invite even more sellers to push GBP/CAD further towards the 1.7325 area, or even to test the short-term upside support line. That line is a tentative one and is running from the low of January.
With regards to the ECB minutes, we don’t expect them to prove a major market moving event. At their last gathering, the ECB officials pushed back their interest-rate forward guidance, noting that rates are likely to remain at current levels “at least through the end of 2019”, instead of “at least through the summer of 2019”, which was the case before. What’s more, they officially announced that they will launch a new series of TLTROs starting in September and ending in March 2021. At the press conference following the decision, ECB President Mario Draghi reiterated that the risk surrounding the bloc’s growth outlook are “still tilted to the downside”, even after the aforementioned policy moves and even after the Bank slashed both its GDP and inflation projections.
Thus, bearing all that in mind, we believe that the element of surprise from the minutes is very little, as there is not much new information we can get. Even if some market participants look for hints as to whether policymakers were considering to push back even more their rate guidance, we got an answer on that front from ECB President Draghi, who noted last week that the ECB could delay an interest rate hike even further if needed, warning that the risks to the bloc’s economic outlook are increasing.
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