Asymmetric trade deal sinks Fed rally
The Federal Reserve continued to release more doves overnight with the FOMC erasing more dots from its plot and removing any hikes in 2019, moving to just one in 2020. Chairman Powell cited a weakening global economy, US-China trade and nervousness about the domestic economy for sitting on their hands. Somewhat confusingly, he then said that the US economy remains strong with wage growth and inflation where they should be. What is clear is that the Federal Reserve is now in a wait-and-see mode and will play what ends up in front of it.
Bond yields fell across the US curve with the two-year 10-year spread now almost flat. Bond markets have been telling the world for some time that they are much more circumspect about the global economic outlook than the “irrational exuberance” the equity markets continue to show. A US yield curve approaching a negative inversion should speak volumes about how long-term money sees the world in 2019. The falling yields holed the US dollar below the waterline as short-term money piled into emerging market currencies and gold.
Even as the Fed and bond markets were yelling nervous patience, the hot money in equities took a circumspect Fed as a reason to buy, with US stocks rallying. Why the street continues to buy stocks when central banks globally are screaming recession escapes these wizened old eyes. My fall-back position in these circumstances is the old saying, “markets can remain irrational longer than you can stay solvent.”
President Trump was having none of that though, nipping the post-Fed rally in the bud by saying the US wants an asymmetric trade deal. The US wants to keep tariffs in place with China after a signed agreement to ensure they comply with the terms. Many would say this is a fair point, but for China, it clearly is not, and likely explains the drawn-out nature of the negotiations. US equities quickly gave back all their gains with the manufacturing- and bank-heavy Dow Jones Index falling 0.55% and the S&P falling 0.29%, with only the tech-heavy NASDAQ remaining in the green by a paltry 0.07%.
Brexit also got murkier overnight, if that was even possible, as the EU told the UK that a short extension is not possible unless the British Parliament passes a deal – any sort of deal will do. The EU has clearly lost patience with Britain. And with Theresa May unable to control the UK Speaker, her cabinet, her party or Parliament, the EU appear to be taking matters into their own hands, addressing Parliament directly with a stark choice. Sign off on the deal tout suite or risk being kicked out on 29 March. Or, take a multi-year extension, hopefully with a new referendum and or government. The harsh lesson in the one-sided nature of votes when engaged in bilateral negotiations will probably not go unnoticed as the pound (GBP) fell 0.47% to 1.3200 even as the dollar fell across the board.
Asia will be in for an interesting session as it needs to decide whether to follow a dovish Federal Reserve or sweat over potential trade deal delays. Today’s data calendar highlights are Australian Unemployment at 0830 Singapore time and the Bank of Indonesia rate decision at 1530. The former is a volatile number, but with elections looming in the lucky country, a poor print could see traders take flight and talk of Reserve Bank of Australia (RBA) rate cuts increase again. Taking the smart option, Indonesia is expected to hold steady, waiting to see how things play out amongst the big boys first.
FX
The US dollar was pummelled after the FOMC with the dollar index falling 0.53%. Only the GBP slid against the greenback amongst the majors. Emerging markets currencies performed well with the Brazilian real rising 0.8% and the Mexican peso rising 1% versus the dollar. This likely means Asia will ignore the jittery bond market and trade talks, with regional currencies possibly posting decent gains this morning.
The Australian dollar (AUD) will as always be a bit of a turkey shoot over employment data but may struggle to hold onto a 0.71 handle if the print is bad.
GBP has carved out some small gains in early session trading, regaining 1.3200. The rally is modest though, and it’s possible the currency markets have yet to reprice the now much higher chance of a hard Brexit, preferring to focus on the likelihood of a long extension instead and assuming this will be bullish.
Equities
The author is torn this morning on regional equities. Will they follow the initial Fed-induced rally overnight or concentrate on the ominous trade talk remarks by President Trump? One suspects a combination of both, with a possible small rally on regional bourses as bond rates fall, tempered by trade talk tensions.
Gold
Gold loves uncertainty, and we saw plenty of that overnight. Falling bond yields and trade-talk wobbles are the nectar of the gods to the yellow metal, which staged a sparkling rally in New York, rising USD12 from its 1,300.00 an ounce lows to 1,312.00. Asia has seized the mantle in early trade rising another USD4 to 1,316.00 an ounce, eyeing technical resistance at 1,320.00. Bids should remain keenly sought, with increased hard Brexit.
