US-China trade concerns dominate

Posted: 9th May 2019

Daily market report May 9th 2019

Market highlights

EUR/USD

The Euro was unable to make headway despite stronger than expected German industrial production data and tight ranges prevailed ahead of the New York open with Italian budget tensions also tending to unsettle the single currency.

ECB President Draghi stated that the bank cannot give up the fight on inflation, although he also stated that upward pressure on nominal wages was building. The Euro was unable to gain any significant support on growth considerations as yields remained very low, although there was an element of defensive support given the strong Euro-zone current account position.

There was some evidence that trade tensions were hampering the dollar with expectations that any damage to the economy would increase pressure on the Federal Reserve to cut interest rates.

There was, however, little enthusiasm for other major currencies which continued to limit the potential for dollar selling and ranges were relatively narrow as caution and uncertainty prevailed. EUR/USD remained uncomfortable above the 1.1200 level and retreated just after the European close. With markets focussed on trade, the dollar was little changed in early Europe on Thursday as both the Euro and dollar failed to secure sustained support with markets braced for volatility later in the day.

USD/JPY

Risk appetite dipped early in the European session following another bout of aggressive US rhetoric on the US-China trade talks. Sources indicated that China had backtracked on legal issues throughout the proposed text of the agreement. Treasuries edged higher and equity futures dipped, although USD/JPY did hold just above 110.00.

There was mixed rhetoric during the New York session with White House spokesperson Sanders stating that China was coming to reach a deal, but there were also reports that China is prepared for an escalated trade conflict. Markets inevitably remained tense ahead of Thursday’s negotiating session. The yen also gained an element of defensive support from unease over the Iran situation as the US announced additional sanctions and stated that there would be no further oil waivers.

Treasuries dipped lower after a weak 10-year auction with the lowest bid/cover ratio since November 2008, but yields dipped again on Thursday. Risk appetite remained fragile after President Trump stated that China broke the trade deal and China’s new lending was reported as below target for April. Asian equities lost ground during Thursday, maintaining the cautious mood and USD/JPY traded below 110.00 as the yen remained firm on the crosses and the Chinese yuan lost further ground.

Sterling

Sterling lost ground ahead of the New York open with sentiment damaged by reports that Brexit talks between the government and opposition Labour Party were close to collapse. Fragile global risk conditions also tended to be a negative factor for the UK currency amid concerns over the international growth environment.

Prime Minister May declined to set any definitive date for her resignation and expressed hope that the Withdrawal Deal would be voted on by May 23rd. Market confidence in any near-term breakthrough was, however, low which undermined confidence amid little incentive for buying. Overall, GBP/USD dipped below 1.3000 before finding an element of support while EUR/GBP pushed to weekly highs above 0.8620 before correcting slightly and settling around 0.8600.

The RICS house-price indicator remained at -23 for April with little evidence of a significant recovery in market sentiment as caution prevailed and Sterling was unable to gain significant traction as GBP/USD traded just above 1.3000.

Swiss franc

Trading ranges in the franc were relatively narrow on Wednesday with the Swiss currency unable to secure strong support even when global risk appetite deteriorated once again.

EUR/CHF found support on approach to 1.1380 and closed just above 1.1400 while USD/CHF gradually regained ground to test the 1.0200 area. There were expectations that the National Bank would resist currency appreciation which curbed potential buying support.

The franc weakened slightly on Thursday despite further losses in equity markets with USD/CHF close to 1.0200.

AUD/USD + USD/CAD

The Australian dollar was unable to make any headway during Wednesday and gradually drifted lower as the combination of a firm US dollar and fragile risk appetite undermined support with AUD/USD dipping below the 0.7000 level.

Risk appetite remained frail on Thursday with losses in regional equity markets and AUD/USD retreated to the 0.6970 area.

Canadian housing starts increased to an annual rate of 235,500 for April from a revised 192,000 previously and well above consensus forecasts.

The overall impact was limited as trade factors undermined sentiment. Although oil prices rallied, USD/CAD strengthened to the 1.3480 area and the Canadian dollar was unable to make headway on Thursday as oil prices drifted lower.

NOK+ SEK

Oil prices had a significant impact on krone moves during Wednesday and underlying global trade fears undermined sentiment. EUR/NOK advanced to highs near 9.84 before a limited correction.

The Norges Bank will release its latest monetary policy statement on Thursday with strong market expectations that interest rates will remain at 1.00%. Forward guidance will still be important with markets looking closely at whether the bank signals changes to the potential timetable for further rate hikes.

EUR/NOK traded around 9.82 in early Europe with USD/NOK above 8.75.

The Swedish krona remained under pressure amid global trade and growth concerns with EUR/SEK advancing to fresh 9-year highs around 10.76 as USD/SEK traded at fresh 17-year highs above 9.60.

Equities

Euro-zone equities attempted to rally during Wednesday, although sentiment remained fragile given underlying US-China trade fears.

The German DAX index advanced 0.7% amid earnings optimism, but there were slight losses for the French and Spanish bourses.

Major UK stocks were protected by a weaker Sterling tone and tentative gains in oil prices, although overall sentiment remained fragile given underlying global trade fears.

With no domestic data releases, trade concerns dominated sentiment with a 0.15% decline for the S&P 500 index and futures lost ground on Thursday ahead of the Washington talks.

Sentiment remained notably defensive in Asia on Thursday as trade issues dominated.

A firm yen tone continued to undermine Japanese equities with the Nikkei 225 index declining 0.9%.

China’s Shanghai index traded 1.1% lower in late trading with no support from domestic data releases while Hong Kong’s Hang Seng index was 1.9%.

The Australian market was able to buck the trend with a 0.4% gain as the Telecoms sector strengthened.

Commodities

Oil prices were again subjected to choppy trading during Wednesday with potential support from Iran tensions offset by unease over global trade prospects.

EIA data recorded a decline in US oil inventories of 4.0mn barrels for the week and gasoline stocks also declined which helped underpin sentiment.

Overall, WTI advanced to just above $62.0 p/b late in US trading. Trade fears undermined sentiment on Thursday with WTI around $61.70 p/b with Brent trading just below the $70.0 p/b.

Although gold was supported by underlying trade concerns, it was hampered by a generally firm dollar. After posting gains into the New York open, gold retreated to post limited losses.

There was support close to $1,280 per ounce amid underlying trade tensions and gold traded around $1,282 on Thursday. Silver was undermined by global growth concerns and traded around $14.85 per ounce.

Cryptocurrencies

Cryptocurrency sentiment held firm on Wednesday with solid gains during the day.

Prices were resilient despite the vulnerable tone in global risk appetite and vulnerability in equity markets. There was also only a limited reaction to reports of bitcoin theft from Binance.

Although there were losses at the Asian open, there was strong support on dips and bitcoin moved above the $6000 level to a fresh 6-month high despite renewed losses in equities.

Ether was unable to capitalise on bitcoin gains and hit resistance close to $180.

Calendar

Major events for the day ahead: (times in BST)

13.30: Canada trade balance

13.30: US producer prices