Markets turn to the Eastern Front

Prepared by Jeff Halley, Senior Market Analyst

Markets turn to the Eastern Front

Wall Street surged yet again overnight as benign US durable goods and producer price-index data reinforced the Federal Reserves “patient” view on US interest rates. The S&P rose 0.70% to 2,810.95; the Nasdaq also rose 0.70% to 7,641.41 and the Dow Jones was up 0.58% to finish at 25,702.95. The latter shrugged off the US Federal Aviation Administration’s grounding of the Boeing 737 Max with Boeing shares finishing slightly higher on the day.

The Brexit soap opera continued with the UK Parliament voting, as expected, against leaving the European Union (EU) without a deal. Today they are voting for an extension of the 29 March deadline. Sterling (GBP) inevitably rose overnight as traders piled into the hope-vs-reality trade, with GBP rising 2.3% to 1.3360 (it’s since fallen). Being irrationally exuberant on the pound could be a dangerous trade at these lofty levels in the short term. By now it’s possible the EU has no clear idea of who is actually in charge in the UK, which has voted on their side. However, no one has actually asked the Europeans what they want, and they may yet impose potentially unpalatable conditions as the price of an Article 50 extension.

The US dollar fell as the favourable rate outlook in the US saw investors unwind safe-haven holdings and rotate out of the greenback.

Overall it was another flip-flop day as a lack of clarity on the US-China trade talks saw the street trading off second-tier economic data and then fitting the story to the positioning.

The excitement in North America could flow into Asia today with heavyweight fixed asset, industrial production and retail sales data from China at 10:00 hours Beijing time. Regionally, Malaysian industrial production and retail sales and the Indian wholesale price index will also be closely monitored. China will be the main feature though, with a downside miss potentially spurring an aggressive unwinding of bullish overnight trading.

FX

The US dollar sell-off should continue into the Asia morning with regional currencies rallying following the rotation out of the greenback overnight. The sudden change in sentiment on the dollar reflects the short-term nature of the markets at the moment. Weak China data this morning, for example, could very quickly see the greenback erase its losses plus interest.

Locally, the Malaysian industrial production and retail sales could cause some intra-day volatility following a poor run of Malaysian data of late.

Despite rising overnight, the GBP has fallen 40 points to 1.3290 in early session trading this morning, highlighting its volatility. As highlighted above, the Brexit picture is murkier than the market is pricing at the moment. While it’s refreshing to see forex market optimism where no one else has for two years, being long GBP at these levels could be a risky trade. We expect the pound to continue to gyrate wildly on low liquidity and headlines this week. Traders would be wise to stay nimble.

Equities

The regional markets should follow Wall Street’s strong lead and trade in the green in early Asia. The optimism surrounding interest rates fuelling the rally will be tempered, albeit ahead of the China data dump mid-morning. As I’ve stated above, a poor showing has the ability to wipe out the Wall Street feel-good factor.

Oil

Oil exploded higher overnight fuelled by a huge (and unexpected) drop in official US inventories. WTI jumped 2.2% to 58.25, and Brent crude rose 1.25% to 67.55 as traders re-evaluate just how effective Saudi export curbs to the US have become.

Gold

Gold rallied USD10 to 1,310.00 an ounce overnight, spurred on by a weak dollar and falling global bond yields. The technical picture indicates well-defined support now at 1,280.00 with gold poised to trade between 1,300.00 and 1,320.00 in the near term.

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