- Risk aversion prevails as top US trade official reins in optimism, Chinese PMIs disappoint
- Sterling cruises even higher as no-deal Brexit risks fades
- Oil rebounds on supply news, but pulls back on demand concerns
- Today, German inflation and US GDP data will be in focus
Risk-off mood prevails amid geopolitical and trade risks, soft Chinese data
US equity markets closed with modest losses on Wednesday and futures suggest they may be headed for even more pain today, amid several risks emanating from both the economic and political arenas. Traders started to turn more defensive after Chinese press reports suggested there are still “big gaps” on structural issues like technology transfer, reigniting trade concerns. This sentiment was later echoed by top US trade official Robert Lighthizer, who testifying before US lawmakers sounded a note of caution, indicating that ‘much still needs to be done’ before a deal is reached, reining in some optimism.
Geopolitically, renewed tensions between India and Pakistan aren’t helping either, with recent hostilities between the two neighboring, nuclear-armed states keeping a lid on risk appetite.
On the data front, some disappointing PMIs out of China coupled with weak data from Japan overnight likely enhanced the ‘slowing global growth’ narrative, delivering the final blow to riskier assets. Asian stock indices were a sea of red, while in the FX spectrum, the best performing currencies today are the defensive Japanese yen and Swiss franc.
Pound soars as no-deal Brexit risk recedes, shorts cover
The British pound continued to bask in relief yesterday, with investors interpreting the potential Brexit delay as diminishing the risk of a no-deal exit, thereby sending sterling/dollar briefly above $1.33. While the outlook for the pound has started to brighten from a long-term perspective, it’s probably still much too early to say this is the beginning of a healthy uptrend for the UK currency.
In short, nothing dramatic has changed in the Brexit landscape. PM May is no closer to securing legally-binding changes to the Irish backstop that will convince UK lawmakers to vote for her deal, so assuming a 2- or 3-month extension, we could be facing down the barrel of the same Brexit deadlock come summer. Hence, it probably won’t be all smooth sailing higher for the pound from here – instead, the currency is more likely to trade like a rollercoaster until it gets the Brexit clarity it needs to regain its former glamour.
Oil rebounds after inventory drawdown, but demand outlook weighs
Crude prices firmed yesterday, following a much bigger-than-expected drawdown in the weekly EIA inventory figures, recovering some of the losses recorded earlier in the week after the US President criticized OPEC for pushing prices too high. Oil prices were further boosted by some remarks from Saudi Arabia’s energy minister, who played up hopes for an extension of the cartel’s current production cuts beyond their current end-date in June. Yet, crude was unable to hold onto all these gains, retreating today in lockstep with risk assets, as the disappointing PMI data out of China overnight painted a darker picture for global growth, and by extent for future oil demand.
German CPIs, delayed US GDP data, and Fed speakers on the docket
As for today, the economic calendar is relatively light, with the only tier-one releases being Germany’s preliminary inflation data for February, and the first estimate of GDP for Q4 out of the US, which was delayed due to the government shutdown.
Note that Germany’s regional CPI data will be released ahead of the nationwide print, so any market reaction in the euro could begin with those.
In terms of speakers, Fed Vice Chairman Richard Clarida will speak at 13:00 GMT. Regional Fed presidents Bostic (13:50 GMT), Harker (17:15 GMT) and Kaplan (18:00 GMT) will all deliver remarks as well.
