Prepared by Jeff Halley, Senior Market Analyst
Dodging the information avalanche
It’s difficult to know where to start this week. We’re expecting a veritable information avalanche with central bank rate decisions, trade talks, earnings and more data releases globally than you can shake a stick at. Weeks like this can be daunting, often causing traders to tie themselves up in knots. As such, it makes more sense to break the week down and take things one day at a time – the markets certainly will.
We can expect flip flops in sentiment each day, but by the end of the week the street should have a much clearer idea of the health of the world economy, the direction of US interest rates and the state of the US-China trade talks – the key macroeconomic event for the first half of 2019, if not the year.
Circling back to Friday and the galactic US GDP print of 3.2% annualised growth, this should be taken with a pinch of salt. Stockpiled inventories accounted for nearly half the number, bringing it much closer to market forecasts. My interpretation is that American businesses are still stockpiling goods as a hedge against a breakdown in US-China trade talks. Of course, they now have to actually sell them, but such details didn’t bother the equity markets with both the S&P 500 and Nasdaq closing at record highs on Friday. The S&P jumped 0.47%, the Nasdaq rose 0.34%, and the Dow Jones was up 0.31%.
As earnings season continues, Tech heavyweights Alphabet and Apple will report after the market closes tonight and tomorrow. The US-China trade talks recommence in Beijing on Tuesday, and although news has been quiet on this front of late, progress appears to be moving steadily forward. The Bank of England rate decision on Thursday will likely be a non-event, with the grand old Lady of Threadneedle Street on hold until Brexit occurs, one way or another – or not at all. We shall be on hold for a very long time then, or not.
The Federal Open Market Committee’s (FOMC) meeting starts tomorrow with a Fed Funds rate decision on Wednesday. While not expected to move, the devil will be in the detail of the statement as investors search for clues as to which way US rates will move. US data has been on a roll this year since the Fed’s dovish turn, and traders will be nervously watching for changes in its dovish outlook. My guess is these nerves are misplaced, and the Fed will happily keep its powder dry with the optionality to cut if needed. Just about every other central bank in the world has also moved to either a neutral or accommodative stance in Q1 as a result of the current two-speed global economic environment. Unlike the President, the Fed knows the US is not an island and will act as such.
Non-Farm Payrolls will finish the week with a flurry, but there’s plenty of data from the rest of the world to keep an eye on. The European Union releases business confidence today, GDP tomorrow and manufacturing PMI on Thursday. The Spanish Socialists Workers’ Party election win overnight will bring a sigh of relief from Europe, but not much else. Data from within the region continues to demonstrate anaemic performance and a poor showing this week could really start to weigh on the euro itself, particularly if the US continues its bright form.
Asia will have a rush of mid-week holidays for 1 May as it contends with an extended Japan Golden Week break. Volumes and liquidity are likely to be greatly reduced over the next ten days but this week itself sees a slew of regional data released. Taiwan consumer confidence, Vietnam inflation, Singapore property price index and Hong King’s trade balance all hit the wires today with South Korean industrial production, retail sales and China non-manufacturing PMI tomorrow. Korean balance of trade appears on Wednesday before a raft of regional PMIs and Caixin China non-manufacturing PMI on Thursday. Excluding China, Asia’s performance of late has been underwhelming, to say the least, and investors will be hoping that this week’s releases show the region is slowing coat-tailing China’s rise of the canvas.
Golden Week in Japan and the impending Labour Day holiday mid-week will likely lead to a subdued start to the week. That said, Wall Street’s impressive close could see regional bourses starting in the green. This exuberance will likely be tempered by the sheer volume of data released this week, as well as US-China trade politics. A continuing poor performance from the region’s economic indicators could cap any gains driven by Wall Street as the week progresses.
The dollar finished Friday mixed after steamrollering all that stood before it last week. Trading had a definite pre-weekend profit-taking look about it, and barring any surprises in the US, we could see normal service resume and the dollar continue on its schoolyard bullying way, supported by data and high yields in a low-yield world. Asian currencies could be particularly vulnerable if this week’s data dump is poor, most notably the Australian dollar (AUD), as the lucky country heads into a Federal election with zero inflation, record low rates and a tanking housing market. The euro (EUR) rounds out the list, having failed to regain 1.1200 against the dollar last week. European data suggests the region itself is the new “English Patient”. Now there’s irony for you.
What goes up must come down, and on Friday it was oil’s turn to be stretchered off as Brent Crude tumbled 3.5% to USD71.60 a barrel. WTI was also holed below the waterline, falling 3.6% to USD63.00 a barrel. The sell-off occurred after President Trump announced he had called OPEC and told them the cost of oil was too high and to start pushing prices down. However, without stealing the President’s fire and brimstone, the sell-off is much more likely to have been caused by highly over-extended long positioning running into the end of the week. I must congratulate the President on his timing though.
With both contracts driven to seriously overbought levels by geopolitics, it was really a matter of when and not if an aggressive correction would occur. It does appear that USD75.00 a barrel for Brent Crude is a near-term top and we will need to see more developments and/or consolidation before the street is prepared to retest. A poor showing by global data releases over this week could leave both contracts vulnerable to a deeper correction, even though the fundamentals for oil remain constructive.
Gold rallied to USD1,285.50 on Friday, tracing out a two-week high for the yellow metal. Gold bugs should probably hold off breaking open the champagne, however. Week-end squaring, a mixed US dollar performance and poor US personal consumption data on Friday were likely the main drivers of gold’s rally, not a structural change in sentiment or gold market dynamics. The yellow metal should continue to benefit from geopolitical and data risk as well as reduced liquidity, but support will manifest itself as buyers on dips rather than traders chasing prices aggressively higher.