Markets turned to risk-off trading yesterday, as Treasury yields resumed their recent tumble. Today, investors may turn their attention to the new round of trade negotiations between US and China. In Brexit land, PM May offered to quit if her deal passes through Parliament, but her attempt seems to have failed to gather the needed support. With regards to the “indicative votes”, none of the options received majority.
The dollar traded virtually unchanged against the majority of the other G10 currencies. It gained notably against NOK, and slightly against SEK, while it underperformed versus JPY and NZD in that order.
Although US Treasury yields resumed their slide, with the 10-year rate dropping 1.81%, the greenback did not follow suit. The currency may have shrugged off the decline in US yields, perhaps as they are still more attractive than those of other major central banks, which shifted more dovish recently. Remember that the RBNZ noted yesterday that the next move in interest rates is likely to be a cut rather than a hike, with New Zealand’s 10-year yields dropping 7.4%. In the Eurozone, ECB President Draghi said that a hike could be delayed even further, pushing the German 10-year yields further into the negative territory. Those yields have turned negative on Friday for the first time since October 2016, after the German manufacturing PMI hit a 6-year low of 44.7.
Moving to the equity market, major EU indices closed mixed, but all the US ones were in the negative territory, perhaps due to the resumption of the tumble in Treasury yields. The risk-off mood rolled over into the Asian session Thursday, with Japan’s Nikkei 225 and China’s Shanghai Composite ending their trading 1.61% and 0.92% down respectively.
Today, market participants may turn their attention back to the US-China trade saga, as US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin traveled to China for another round of negotiations. There is also a plan for a Chinese delegation led by Vice Premier Liu He to visit the US next week.
On Monday, we noted that we may get once again “further progress” remarks, but no final accord. Indeed, positive headlines have already started hitting the wires overnight, noting that China has made proposals on issues including technology transfer, that are more specific and with a wider scope than before. The sealing of a deal is expected to happen at a meeting between US President Trump and his Chinese counterpart Xi Jinping, which according to market chatter could even be pushed back to June. It would be interesting though to see whether these talks will set the stage for the Trump-Xi meeting to happen earlier than anticipated.
As for our view, yes, headlines suggesting further progress could prove positive with regards to the broader risk appetite. Equities could rebound somewhat, while safe-haven assets are likely to come under selling interest. However, we doubt that this round of talks has the potential to offset fears with regards to a global economic downturn. Unless economic data start to show some stabilization in global growth, we would treat any trade-related recovery in equities, and other risk-linked assets, as a corrective bounce before the next negative leg. With regards to the safe-havens, even if they correct somewhat lower, we expect them to return to the front seat, as was the case with the Japanese yen yesterday.
Looking at our Nasdaq 100 cash index, we can see that after a few failed attempts to travel back up towards the March high, near the 7515 level, the index travelled lower again. The price is now balancing slightly above this week’s current low, at around 7260, but given the recent weakness, that low might end up not being the lowest point of this week. For now, we stay cautiously-bearish, at least in the short run.
A drop below the above-mentioned 7260 level could open the door to a further slide, where the next potential support obstacle might be around 7215, marked near the high of March 12th. But if that barrier is only seen as a temporary pit-stop for the bears to refuel, another drop could put the 7160 hurdle back on the radar. This area acted as good support on the same day. Also, this is where the price could meet its 200 EMA.
On the upside, in order to start aiming for higher levels, we would initially like to see a push back above the 7375 barrier, which marks yesterday’s high. This way the index could have a good chance of drifting further up, where it may test the Tuesday’s high, near the 7418 hurdle. Now a break of that area, in our view, could provide even better chances of seeing a further price acceleration, which might lead to the current March high, at 7515.
The pound was once again found virtually unchanged against the US dollar, which means that it performed similarly versus the other G10s. It gained the most against NOK, with SEK taking the second place, but still far behind, while the currencies that managed to capitalize versus the pound were JPY and NZD. The others were found in a narrow range, nearly unchanged.
With Brexit becoming a daily sequel, UK PM Theresa May offered to resign if MPs decide to accept her deal. Although, according to media reports, this may have prompted 40 MPs to change their mind and say that they could back May’s deal, Northern Ireland’s DUP leader Arelene Foster confirmed that her party will not support it, which keeps the chances of a majority low, as the minimum number of MPs who need to change their mind is 75. The government noted that the deal may be put back to vote on Friday, but House Speaker John Bercow repeated that this cannot happen unless there are material changes made.
With regards to the “indicative votes” lawmakers held with regard to how the UK could move forward, none of the proposals received majority. “In a spectacular display of indecision, the House of Commons has voted against remaining in the EU and every version of leaving the EU”, said Conservative Party’s Vice-Chair James Cleverly using his twitter account. Given that some proposals were closer to secure majority than others, parliament may hold another round of votes on Monday, after the options are narrowed down to those which have more chances to pass through.
With regards to the pound, the currency was sailing north ahead of the May’s address and the votes, perhaps on hopes that lawmakers can eventually break the deadlock. However, it came back under selling interest to end nearly unchanged against most of its major peers, as the outcomes failed to clear the landscape. In our view, we are back to the point we were yesterday morning, but one day closer to the new divorce date of April 12th. With the clock ticking toward that date, and all the options still on the table, from a no-deal Brexit to no Brexit at all, we stick to our guns that it is hard to confidently assess where sterling may be headed next. For now, we still expect it to stay headline driven, with anything suggesting that a disorderly withdrawal is becoming less likely having the potential to provide support, and vice versa.
We have been seeing mixed trading activity lately in GBP/AUD, where the pair continues to move sideways between roughly the 1.8390 and 1.8775 levels. At the same time, the pair remains above its medium-term upwards moving trendline taken from the low of December 3rd. Given yesterday’s late decline, we may see a follow-through of such activity, where the rate may slide again. That said, because the pair is still above the above-mentioned trendline, the downside could be limited, hence why we will stay somewhat bearish in the short run, but we will continue aiming higher in the medium-term, as long as that upwards moving trendline remains intact.
If GBP/AUD drops below the 1.8540 hurdle this may be a good signal for more bears to join in and push the pair further down, towards the 1.8485 barrier, marked near the low of Tuesday. If this area fails to withhold the bear-pressure, a further move down might place the rate on the previously-mentioned upwards moving trendline, which could stop the slide. If the uptrend line stays intact, the bulls might see it as a good opportunity to jump into the driver’s seat and lift GBP/AUD back up. We will then target the previously-mentioned levels again, this time from underneath, but if the buying activity remains strong, the rate may accelerate further, potentially reaching the 1.8675 area. This marks the high of Monday.
Alternatively, in order to start considering a medium-term bearish reversal, we would like to see a break of the aforementioned trendline and a drop below the 1.8390 level, which is the lower side of the above-discussed range. This is when we may see the rate sliding towards 1.8335 hurdle, a break of which would confirm a forthcoming lower low and potentially lead GBP/AUD to the 1.8200 hurdle, which marks the low of February 25th.
Apart from the Brexit sequel and the US-China saga, investors may also keep an eye to the economic calendar and the data that are due to be released today. From Germany, we get preliminary inflation data for March. Expectations are for both the CPI and HICP rates to have remained unchanged at +1.5% yoy and +1.7% yoy respectively. This could raise speculation that Eurozone’s headline CPI, due out on April 1st, may hold steady as well.
In the US, the 2nd estimate of the US GDP for Q4 is coming out and expectations are for a downside revision to +2.4% qoq SAAR from the preliminary print of +2.6%. Combined with the Atlanta GDPNow and the New York Nowcast models, which point to much lower prints for Q1 2019 (1.5% and 1.3% respectively), a downside revision in Q4 GDP may prompt market participants add to their Fed-cut bets. US pending home sales for February and initial jobless claims for the week ended on March 22nd are also due to be released.
As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. The Tokyo CPIs for March are coming out and while no forecast is currently available for the headline rate, the core one is anticipated to have ticked down to +1.0% yoy from +1.1% in February. Employment data, retail sales and preliminary industrial production, all for February are due to be released as well. The unemployment rate is expected to have ticked down to 2.4% from 2.5%, retail sales are anticipated to have accelerated to +1.1% yoy from +0.6%, while IP is forecast to have slid at a slower pace than in January (-2.5% mom from -3.4%).
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