Washington the place to be
All eyes will be on Washington on Wednesday, with high-level trade talks getting under way between the US and China, and the Federal Reserve announcing its latest monetary policy decision.
Deteriorating Sino-US trade relations and an overly keen Federal Reserve were two of the most prominent causes of the sell-off in the final quarter of last year so it’s no surprise that so much attention will be on these events today. Markets have bounced back from the fourth quarter plunge but they’re still yet to fully recover and so confidence remains very sensitive to developments in both areas.
Trade talks appeared to be moving along smoothly until last week, after which rumours of a cancelled meeting, reports of a deal being “miles and miles” away and the US decision to charge Huawei have given a different impression. There will be hopes on both sides that any differences that have arisen can be ironed out during this visit, with the 90 day deadline now being a little over a month away.
Fed still has work to do with yield curve still inverted
The Fed has made significant strides in settling investors, worried about interest rates rising too quickly and the economic ramifications of an overly aggressive tightening policy. They’re not out of the woods yet though and much will depend on how they manage the upcoming months. Questions around quantitative tightening are expected to arise today, when Chairman Jerome Powell holds his press conference. The US yield curve remains inverted which will continue to unsettle investors concerned about potential recession risks.
Dollar soft ahead of meetings, supporting gold
A more dovish Fed and/or progress in the trade talks could weigh on the US dollar at a time when it’s already coming under pressure. The greenback has shown some resilience considering just how significant a shift we’ve already seen from the central bank and the progress seen between Washington and Beijing but there is room for it to come under pressure again.
The drop in the dollar since mid-December has been a major driving force behind gold performing so well, rising above $1,300 finally last week and building on that in recent days. Softness in the dollar ahead of the meetings in Washington is lifting gold again today, with $1,320 offering the next test for the yellow metal.
Oil rally stalled but risk appetite could return
The rally in oil has stalled over the last few weeks, with WTI and Brent having gained around 25% from the lows in late December. This has coincided with a similar pause in the equity market rally over the last couple of weeks which suggests the momentum from a bump in risk appetite has petered out. This could continue in the coming weeks but WTI and Brent face a big test of resistance around $65 and $55, respectively, a break of which could be very bullish.
