Prepared by Jeff Halley, Senior Market Analyst
British pound produces sterling performance
As the first of a probable three key UK Parliament Brexit votes begins today, the markets have assumed the inevitable outcome will be a request for the European Union to extend the Article 50 leaving date on Thursday. As such, the British pound (GBP) soared from its Monday opening at 1.3000 to 1.3290 before settling at 1.3240 in early Asian trading. That’s a stellar 1.80% gain in the last 24 hours.
The GBP led a US dollar retreat overnight as first Asian and then European stocks shrugged off the clouds of Friday and posted healthy gains. European banking stocks found tailwinds from a rumoured Deutsche Bank/Commerzbank merger, while the UK FTSE 100 got a sugar rush from the no-news-is-good-news Brexit optimism. US stocks were quick to follow suit as US retail-sales data rebounded from December’s disastrous figure to post a 0.20% gain.
Wall Street enjoyed a positive day likely due to an Apple upgrade and Nvidia buying an Israeli semiconductor company, resulting in a climb of 2.0% on the Nasdaq and 1.47% on the S&P. Significantly both indices recaptured their 200-day moving averages. Impacted by Boeing, the Dow was a relative laggard closing 5.36% down but still finished the day a respectable 0.79% higher.
This newfound wave of optimism despite a concrete US-China trade deal, tier 1 data, or any shred of a cohesive outcome to Brexit highlights two likely scenarios. One, a large amount of fast-money trading has taken place based on headlines and hope, and therefore there could be an equally high chance of potentially ugly corrections. Two, investor money has been sat on the sidelines waiting for the macroeconomic clouds to clear and has grown impatient, joining the hope-versus-reality trade.
Either way, for now, the street appears to be saying that no news is good news and has an itchy risk-seeking trigger finger that could set the tone for Asian markets today.
The USD retreated overnight, most notably against the GBP due to Brexit optimism. We’ll probably see another very choppy headline-driven day on the pound ahead of today’s vote. Initial resistance is at 1.3300 followed by 1.3350. Without sounding like a broken record, traders would be wise to beware UK politicians bearing gifts. It’s likely we will see high volatility and poor liquidity on the pound today, and smart traders would do well to stay nimbler than the negotiations have been to date.
This morning, Australian home-loans data may cause short-term volatility in the Aussie dollar, which has struggled to rally despite a weaker USD.
With investors clearly in a risk-seeking mood for now and both the USD and bonds weaker overnight, the feel-good factor could overflow into Asia and see regional currencies enjoy a positive start against the greenback.
With China equities climbing off the canvas yesterday and very positive days in Europe and North America, Asian bourses could see a bright start. Investors are clearly in an optimistic mood despite nothing having changed materially around the world, and that optimism could continue in Asia trading. Investors should be cautious however because the rally is built on fragile foundations. It would be wise to stay nimble in a headline-driven market.
Crude oil sailed higher as Saudi Arabia reiterated it would continue its above-quota cuts past the April OPEC+ meeting and continue to curb exports, which should further squeeze US refiners and offset increased shale production somewhat. Brent crude rose 1.40% to USD66.70 a barrel and WTI 1.30% to USD56.80 a barrel. Some initial profit-taking could be seen in early Asia trading, but the positive risk environment may see buyers on any dips.
Gold was surprisingly resilient overnight, ending the New York session only USD7 lower at 1,293.00 an ounce. Whether this is a hint that the overnight equity and currency rally is built more on hope than reality remains to be seen. In the meantime, gold seems to have found a new range between 1,280.00 and 1,300.00 an ounce and appears content to consolidate there.