Risk appetite was very strong in the US as optimism grew that the EU and UK were inching closer to a Brexit agreement, retail sales in North America rebounded more than expected, M&A delivered a $6.9 billion tech deal, and a couple of technology giants got analyst upgrades. The Dow Jones Industrial Average posted a modest gain compared to the other indexes as Boeing posted its worst decline since the September 11th attacks. Boeing shares fell as much as10% on the day after a Boeing 737 MAX-8 crashed in Ethiopia over the weekend, it was the second crash in several months.
GBP – Do or die time for PM May
EUR – Bunds flirt with negative territory
Stocks – Tech leads the way higher
Oil – Crude higher on Saudi cuts and Venezuelan disruptions
Gold – Trade optimism keep bears in control
The British pound could have its biggest week of volatility since the Brexit referendum. Cable rose for the first time in eight sessions, as optimism grew that we could finally get some clarity on Brexit this week, that could ultimately lead to an extension of Article 50. The pound rose on several positive headlines that ranged from optimism that the EU is starting to provide meaningful tweaks in language on the backstop, Irish media noting that progress is being made, and to last minute meetings between PM May and EU Commission President Juncker.
This week could see three key votes from UK Parliament, the first will be the Tuesday vote on May’s latest Brexit deal, which is still expected to fail. The next day would then yield a vote on the legislation to leave the EU at the end of March without a deal. Parliament is expected to reject that, which would then deliver another important vote to see if they will want to seek an extension to the Article 50 negotiation period.
At then end of this week, the risk of a no-deal Brexit may be removed temporarily. The questions that remain are will we see a second referendum and will PM May have to deal with another confidence vote. Cable’s path higher is not a clear one and any extension that is approved in UK Parliament would need to be cleared at the EU Summit on March 21st and 22nd.
The euro finished higher for a second consecutive day, shrugging off disappointing industrial production data from Germany and mainly benefitting from the broad risk rally. Safe-haven currencies, the Japanese yen and Swiss franc are also sharply lower on the session.
CFTC data showed that euro bearish bets grew 7.9% on the week ending March 5th to 78,166 contracts, the highest level since December 2016. Big investors and hedge funds may have been overly short last week and if the we do not see a quick return to 1.12, we could see a short-squeeze drive the euro back toward the 1.13 region.
A major headwind for the euro remains the steady decline lower with the yield on the 10-year German bund. Last week’s ECB policy decision signaled to markets that rates will not rise at the end year, and the slashed economic forecasts could mean negative rates could be upon us soon. Negative yields may detract some foreign investors, but negative rates may soon become common place as investors prefer German bonds over the struggling periphery.
The S&P 500 had its best day in a month as technology stocks led the way higher. Asia equities are poised to open higher after Bank of America Merrill Lynch raised their rating on Apple due to stability in its global supply chain. Optimism for Apple will also come from 5G upgrades that will affect 2021 deliveries.
Mergers and acquisitions are important for equities to remain attractive and today’s news that Nvidia will buy computer-networking supplier Mellanox Technologies in an all-cash $6.9 billion deal is very positive for the tech sector. Many analysts feared that the recent rally in tech stocks would derail deals in the short-term.
Crude prices were supported on news that Saudi Arabia will over-deliver on production cuts, for a second consecutive month, and expectations Venezuela will see their output fall even further due to the US sanctions and power outages that are ravaging the country. Saudi Arabia is committed to rebalancing the oil market and have taken the lead on delivering the bulk of the production cuts. With US production likely to ramp up in the warmer months, Saudi Arabia appears poised to rebalance the market before the April 17th and 18th OPEC meetings. Saudi Arabia is also delivering cuts to exports in the US, which has forced the US to use up their inventories.
The market is expecting for OPEC to extend their production cuts in April, but the effects will likely see crude struggle higher as US production begins to ramp up. Once when we start to see both rig counts rise in the US and production levels increase, oil may see a pullback that takes West Texas Intermediate back to the mid-$40 region. Global growth is the other key side to the direction for oil and stable growth would be supportive for prices, but we may not the effects of Chinese fiscal stimulus kick in until the latter part of the year.
Gold appears it will struggle to muster up a rally unless we see talks fall apart in the US-China trade war. The precious metal was unable to recapture the $1,300 an ounce level as a broad risk-on trading session was supported by a rebound with US retail sales, trade optimism, and a robust stock trading session that was led higher by tech stocks.
Expectations are for trade deal to be queued up this month and the precious metal may need the market to see a trade deal finalized to flush out the shorts. The potential of a letdown on the terms of the US-China trade agreement are high and that might be the catalyst the yellow metal needs to get its mojo back. The announcement of a deal could drive gold sharply lower initially but we could see a bottom put in place as the markets would then shift to the accommodative stances being broadcast by all the major central banks.