Global markets rally on Monday, cheering the decision by Washington and Beijing to pause their trade war as Trump and Xi reached the cease-fire during a meeting in Buenos Aires. According to new arrangement, overt the next 90 days, the US and Chinese officials will continue to negotiate the trade issues, including intellectual property. During this period, the two countries won’t implement additional tariffs and will try to resolve the trade war. The breakthrough in negotiations have fuelled investor optimism across the globe, with recovery in oil prices added to the positive sentiment in the financial markets as Russia and Saudi Arabia agreed to extend into 2019 their deal to manage the oil market.
As such, Italy’s FTSE MIB gains 1.96 per cent to 19,563, Britain’s FTSE 100 adds 2.14 per cent to 7,129, France’s CAC 40 rallies by 1.74 per cent to 5,090, while German DAX 30 gains 2.50 per cent to 11,538. US stock index futures are poised to rally as well, catching up with the improving global sentiment.
The greenback turned higher on the day against the European currencies despite the surge in risk sentiment. So, EURUSD slipped from 1.1380 to a daily low of 1.1325, while GBPUSD was rejected from levels above 1.28 and down to lows marginally above 1.27. Interestingly, the pairs have ignored the positive manufacturing PMIs in the euro zone and the UK, as well as failed to receive a sustainable upside impetus from US-China-inspired optimism. Such a behavior may point to two things. First, traders continue to keep in mind the European issues such as the Italy’s deficit problem and Brexit uncertainty.
And judging by market mood, investors still doubt that the situation will evolve in a positive manner. Second, we see that both euro and the pound remain attractive for selling on rallies. This is despite the recent Fed’s ‘dovishness’ and doubts in further tightening path in the US. In the short term, the dollar sentiment will depend on the incoming signals by the Fed, and should the officials confirm a more measured and cautious approach, the buck may come under a more intense pressure. But it doesn’t mean that the US currency will break out of its bullish trend any time soon.
By the way, there is a risk event for the pound that could prevent it from a meaningful recovery in the days to come. This is next Tuesday’s meaningful vote in parliament. The risk of May losing this vote remains high, so the cable will likely continue to sell it on rallies as before. Moreover, if she loses a key vote, the UK’s main opposition party will likely seek to topple May’s government and push for a general election. Technically, the longer the GBPUSD pair stays below the 1.30 threshold, the higher the downside risks are.
USDJPY failed to catch a bid despite a better risk sentiment. The pair has faced a resistance of 113.80 earlier in the day and dipped to a daily low of 113.37. Since then, the dollar has trimmed losses and got back to the 113.50 area as the general selling pressure on the buck has eased. The yen’s behavior shows еthat the current investor optimism may well ebb quite soon, as markets will start to realize that the progress in US0China trade relations is not enough to bet on the end of the war as there are still many issues to be resolved. She short-term dynamics in USDJPY will likely be neutral until the dust settles and investors take a more clear position on risky assets.
Brent crude rallied over 5% but failed to show sustained gains above the $62 figure. The prices have trimmed intraday gains but remain firmly in the positive territory. The news that Russia and Saudi Arabia decided to extend their pact to manage the market was cheered by traders as now they can form more bold expectations ahead of this week’s OPEC+ meeting. On the other hand, due to importance of the event, market participants prefer to take positions cautiously, which caps the bullish potential in prices. The additional support for the market came from Canada, where the largest producing province ordered unprecedented output cuts. Technically, Brent needs some more impetus to regain the $62 figure, while the key immediate support comes at $60.
Nathan Lambert, Head of Global FX Analytical Department