Despite an awful end to 2018, the new calendar year has seen the first week get off to a decent start. The first full trading week of 2019 has been in marked contrast to how investors were reacting in the aftermath of last month’s Federal Reserve decision to raise rates, and Fed chair Jay Powell’s rather hawkish press conference.
Since that meeting sentiment has shifted quite significantly to one of cautious optimism, after five days of gains for US markets in the wake of a bumper US non-farm payrolls report, and a rowing back on the part of the US Federal Reserve, and Chairman Powell, on the hawkish rhetoric that had been a hallmark of 2018.
The more cautious jawboning on balance sheet reduction being on auto pilot appears to have gone some way to persuading investors that the Fed has belatedly recognised that its current tightening strategy has the potential to pose significant risks to the global economy, and as a result we’ve seen a raft of FOMC members also come out, to make the case that now is the time for patience when it comes to future rate rises.
This change of tone, along with a slightly more dovish composition to the vote setting committee might suggest that we probably won’t see another rate rise in the next six months, if we see one at all this year.
The decision by China in the early part of the month to cut bank reserve requirements to help its faltering economy has also helped markets, along with a much more collegiate atmosphere with respect to trade relations, between it and the US. This has added to a feeling that the we may well have found a short-term base, despite rising concerns that weak economic data from the likes of Germany, France, Italy and the UK suggests the potential for a sharp slowdown in economic activity in the last quarter.
The latest China December trade data has reinforced these concerns. The most recent November trade numbers showed a sharp decline in exports from 15.6% to 5.4% as the trade war between the US and China showed signs of biting. Imports also fell back sharply and there was a faint hope that today’s December numbers might see this improve.
This morning’s numbers showed that far from improving the trade picture deteriorated further with exports declining 4.4%, as the global economic picture became more worrying. Much more concerning for an economy supposedly rebalancing away from big industry the import data slowed as well, reflecting a sharp slowdown in internal demand sliding 7.6%, missing expectations of a 4.5% rise. As far as China’s business with the US is concerned the trade surplus rose to a ten year high, even if the overall surplus was lower. Disappointment over this mornings data has seen Asia markets slip back and will see European markets open lower this morning.
Economic risks along with geopolitical uncertainty are still set to remain front and centre this week, as the US government shut down heads into its fourth week, and tomorrow the UK parliament votes on Prime Minister Theresa May’s highly contentious Brexit withdrawal agreement, which means that markets are likely to remain on edge for a while longer and despite last week’s gains, it remains premature to sound the all clear. Markets are still very much in sell the rally mode given how far below last year’s peaks we still are.
All indications are that MPs will vote down tomorrow’s Brexit deal, with the prospect that the government could likely face a vote of no confidence in it from the opposition Labour Party, whose own Brexit policy is equally as opaque. With the battle lines being clearly drawn between the various factions in both government and opposition parties, we could face the very real possibility that the government’s own MPs could bring about its own demise, if they feel that it would serve the purpose of trying to either deliver or prevent Brexit.
Despite these concerns the pound has managed to hold up reasonably well, ending last week higher on speculation that in the event of the deal being voted down, MPs will somehow force an article 50 extension as parliament takes control of the Brexit process. This could see MPs strive to come up with a compromise solution, whether it be Norway, Norway+ or some customs union variant that can garner a majority in the House of Commons. This of course relies on the EU accommodating such a request, in the hope that a solution can be found.
This is by no means certain and it’s not as if the EU doesn’t have problems of its own, with disaffected voters in Italy and France, while in Greece the government there is facing a confidence vote of its own.
EURUSD – after failing last week at the 1.1570 area, we’ve since slipped back below the 1.1500 level and could well fall further towards the 1.1420 area. If we fall below the 1.1420 area we could see further weakness towards the 1.1360 area. We could still head towards the 1.1600 level, and potentially the 200-day MA at 1.1640, if we can hold above the 1.1420 area or last Tuesday’s low.
GBPUSD – broke through the 1.2820 last week, pushing up to a one month high, with the potential we could head towards the 1.2930 area. A move back below the 1.2800 area reopens the prospect of a move back to 1.2680. A move below 1.2400 retargets the 2016 lows near the 1.2000 area.
EURGBP – failed to breach the range highs at 0.9100 last week, falling back from the 0.9070 area. A move down through the 0.8900 area has the potential to reopen up a move towards 0.8870 initially and then the 0.8820 area.
USDJPY – while below the 109.20 area the US dollar is susceptible to a move back towards the 107.50 area, and back down towards the 106.00 area, towards the lows at 104.60. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.