Trader thoughts - the long and short of it

After a week fully dominated by trade headlines, the coming week will look to US inflation data and earnings reporting from global financial institutions.

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Source: Bloomberg

There is the anticipation of further pricing pressure will complement the release of the Federal Reserve’s release of minutes from their March meeting where they raised interest rates.

The volatility that steadily rose through the week caused Wall Street to end lower on Friday, and down roughly 1% for the week. The catalyst for late week selling was the weakest jobs report in six months at 103k private jobs added with a drop of nearly 2% and keeping the benchmark lower for the year. Recently, the Volatility Index (VIX) has been on a steady rise over the last 30 days in the aftermath of the risk heart attack of early February. The rise in volatility favours price swings increasing with investors flipping from depression to euphoria.

The war of words continues between China and the United States in what is being presumed by markets as positioning for negotiation as opposed to the precipice of a true trade war. On Friday, China hosted a press conference to update the market on the lack of progress and resolution in trade talks. China’s Commerce Ministry spokesperson Gao Feng said for a “period of time,” officials from both sides haven’t had any negotiations on any trade issues making it difficult for investors to imagine a speedy solution is at hand. Either way, it appears that China should not be expected to submit to any trade intimidation by the US.

Commodities echoed the drop in global equities as President Trump called for an additional $100 billion in imports from Asia. China is the top copper producer, and consumer, in the world, but threats of US imports of copper were enough to the leading industrial metal lower. Crude Oil also completed its worst week in a month on the view that escalating trade tensions could impede potential demand for energy, which is a necessity to absorb aggressive production from US shale that would flood the market should demand wane.

While risk appetite took a hit to finish the week, Jerome Powell made his first public speech as head of the Fed to speak about the outlook for the US economy. Powell failed to mention the recent market volatility and only said that trade discussions were in too early of a stage to speculate.  Powell instead was promoting the view of gradual Fed rate hikes as job-market slack remains to reach Fed goals.  If a concerning comment was made, it was an expected nod to the significant upcoming shrinkage of the Fed balance sheet that will tighten financial conditions.

S&P/ASX ends first week of April, Q2’18 on a flat note: Weighed by fears of growing trade tensions between two of its major trading partners, the benchmark Australian stock index fell by -0.1% to 5788.70 on Friday. US President Donald Trump’s threat to hits China with $100 billion of tariffs led to a steep selloff in US equity markets at the end of the week, and it appears that Australian stocks are being dragged down by the turn in global risk sentiment – not borne out of fear that the Australian economy itself would be severely negatively impacted.

March US payrolls disappoint, push back Fed hike expectations: The March US Nonfarm Payrolls report came in wellbelow expectations at +103K versus +185K expected. Over the past 10 years, March has been a month that typically produces disappointing figures, however, with the actual reading missing on average by -41.5K relative to consensus estimates. Last month, the reporting period fell in a week where snowstorms hit the United States’ major population centres along the Atlantic Seaboard, suggesting that weather played a significant impact. Nevertheless, Fed rate hike expectations dipped on the data, with rates markets now pricing in less than a 30% chance of seeing four rate hikes in total in 2018.

AUD/USD falls for a fourth consecutive week: The Australian Dollar slid versus its American counterpart by -0.22% on the week, provoked by a deterioration in global risk appetite thanks to rising trade tensions between China and the United States. While the Reserve Bank of Australia held rates at 1.50% once again, it was also noted that tightening financial conditions in the US could spill over to Australia and impact households whose debt is at all-time highs amid stagnant wage growth. We’ll hear more about how global tensions could be negatively impacting Australia this week when RBA Governor Lowe speaks in Perth on Wednesday.

Market Data as of Friday, April 6, 2018:

SPI futures moved -0.07 or 0% to 5788.74.

AUD/USD moved -0.0008 or -0.1% to 0.7676.

On Wall Street: Dow Jones -2.51%, S&P 500 -1.83%, Nasdaq -2.14%.

In New York: BHP -1.82%, Rio -1.77%.

In Europe: Stoxx 50 -0.64%, FTSE 100 -0.22%, CAC 40 -0.35%, DAX 30 -0.52%.

Spot Gold moved 0.43% to US$1332.3 an ounce.

Brent Crude moved -1.93% to US$67.01 a barrel.

US Crude Oil moved -2.5% to US$61.95 a barrel.

Iron Ore moved -2.3% to CNY447 a tonne.

LME Aluminum moved 0.9% to US$2009 a tonne.

LME Copper moved 1.37% to US$6816 a tonne.

10-Year Bond Yield: US 2.78%, Germany 0.5%, Australia 2.66%.

 

Written by: Tyler Yell and Christopher Vecchio, Currency Strategists, DailyFX

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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