Prepared by Jeff Halley, Senior Market Analyst
Markets consolidate as Trump tweets oil
The collective sigh of relief as president Trump extended the China tariff deadline was palpable in markets overnight, nowhere more so than China itself, where the Shanghai rose 5.6% and the CSI 300 jumped a whopping 6%. The rest of the world seemed to take a more sanguine view of proceedings, with the Asian and European indices climbing steadily but not spectacularly into the green.
Wall Street also continued its positive run with the S&P limping 0.1% higher and the Dow Jones rose 0.4%. The close could have been even more tepid had General Electric not soared a mighty 15% following the announcement of the sale of its bio-pharma division.
Elsewhere the dollar was slightly lower against most currencies as haven flows reversed course. The New Zealand Dollar (NZD) increased 0.80% after posting much higher retail sales, while the British pound (GBP) rose above 1.3100 to 1.3135 this morning as the UK Labour Party announced its support of a second Brexit referendum. Perhaps highlighting the lamentable state of affairs in British politics, it’s taken the main opposition party two years – until just one month before Brexit – to come out with an official position on this.
Overall though, the somewhat subdued market moves of yesterday suggest the street was already positioned for the Trump tariff tweet over the weekend and the nouveau bullish flows of yesterday quickly ran into profit-taking.
One highlight was energy where President Trump’s Twitter account struck again. Trump told OPEC to “relax” and that oil prices were too high. Subtle. Oil took its “chill pill” and immediately ran aground, with Brent plunging 3.5% to USD64.80 and WTI falling 3.2% to USD55.50. The timing was impeccable catching many traders very long after a two-week rally.
Federal Reserve Governor Jerome Powell heads to the Hill for two days of testimony today, and US Consumer Confidence will also be closely watched. Locally, Singapore Industrial Production will be released at 1300 local time with markets hoping for a 1% bounce back after December’s dire 5.6% fall.
Haven flows out of the US dollar should continue into regional currencies today but we can expect a trickle, not a torrent. As the low volatility implies, the FX markets seem trapped in a no-man’s land of late, awaiting clarification of macro drivers. Despite all the noise, we don’t have many.
The GBP continues to rally, more on hope than reality, and being long at these levels in recent times is not a trade that has ended well for many.
Equities should open positively in Asia but without any fireworks. The street (except China) appeared to be nicely long heading into the weekend, which has taken the edge off the surprise factor. China will be the main driver for the Asian session with a follow-on rally from yesterday’s spectacular jump, likely dragging regional bourses higher.
The oil markets have been the most optimistic on a US-China trade deal over the last two weeks. As a result, they were probably the longest and therefore the most vulnerable to a headline-driven sell-off. The technical picture agreed, with the Relative Strength Index (RSI) on both Brent and WTI at extreme overbought levels.
President Trump has duly obliged and popped the balloon, at least temporarily. The technical picture suggests both contracts have room to fall more from here, with significant support being USD60.00 a barrel for Brent and USD52.00 a barrel for WTI. Volumes in Asia will be light with traders nervous of further headline-driven moves.
Gold closed unchanged at USD1,327.50 per ounce overnight in a moribund session. Overall gold is sitting in the middle of its monthly USD1,301.00/1,348.00 range and continues to consolidate from a long-term perspective. In the shorter term, traders are clearly focusing their attention elsewhere.