US Equity Bounce Within 'Risk-Off' Context

Quick Take

The ‘risk-off’ regime we’ve gradually transitioned into since mid last week still remains in place, with some minor signs of abating via equities not yet providing enough technical evidence to shift the focus back to bid risk. Unless the equity bounce is backed by yield curves or a significantly weaker DXY, I wouldn’t read too much into the late US equity rally as to single-handedly be able to revert the fortunes of what’s an otherwise still cloudy outlook.

In today’s write-up, I argue in favor of a potential continuation of the JPY strength against selected currencies such as the EUR or the AUD. Similarly, amid this environment, commodities such as Oil should go through a hard time. If global equities resume the rollover, it will take us back into micro-macro ‘risk-off’ flows back in alignment, likely to support USD, JPY, Gold.

Narrative In Financial Markets

  • US politics the main driver in the last US session on Friday, as Trump wall talks breakdown, which is raising the prospects of another government shutdown.
  • The US administration is mulling 3 different options for EU car tariffs: 10% rate, 25% rate, specific customs duties. The news didn’t bode well for European stocks.
  • Canadian jobs showed another blockbuster reading with 66.8k new jobs. One fears seasonality factors are playing a major factor in the back-to-back outlier prints in Dec, Jan.
  • After news broke out that Trump and Xi won’t meet before the March 1st China-US tariff deadline, we learned over the weekend that the next trade talks set for Feb 14–15.
  • The massive rise in iron ore prices continues, currently at a 4 ½ year high. One can argue that the surge in the commodity + late rise in the SP500 helped lift the Aussie off lows.
  • San Francisco Fed President Mary Daly raises the prospects of a potential idea in which the Fed uses QE as a more regular policy tool in the foreseeable future if pre-conditions in place.
  • The Forex market continues to be characterized by the rude health in USD demand flows, in what is widely perceived as the temporary winner of a very ‘ugly contest’.
  • Barnier says EU won’t reopen the Brexit divorce deal while UK PM May is said to be seeking legally binding changes to the withdrawal agreement in meeting with Ireland’s PM.
  • Not only Italy is in a technical recession to start the year, but Istat (Italian Statistics Bureau) warned that it foresees a pronounced slowdown in economic data. Italy is the elephant in the room not many are talking about after the budget deal with the EU but watch this space.

Potential Drivers — Economic Calendar

China is back from holidays, that’s why it will be critical to follow very closely the performance in the Yuan as a continuous barometer of the trade negotiations alongside the Shanghai Composite/CS300.

The overarching key story ruling markets continues to undoubtedly be the China-US trade negotiations. The rhetoric has turned progressively negative since last week, with the cancelation of the Trump-Xi meeting the last straw to see an increased interest to go ‘cash’ and play more defensive. That’s why this week’s trade talks will be, as has been the case, highly critical to monitor even if the complexities involved suggest these are talks that are most likely going to go down to the wire, hence no breakthroughs are eyed short-term.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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