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Morning Call: Davos, Transatlantic Truce, German ZEW

Morning Call: Davos, Transatlantic Truce, German ZEW

Europeanmarkets are under the influence of the IMF’s warning about global growth. Thebank has trimmed its global growth outlook, but it did provide some silverlining by mentioning that the world economy will strengthen in 2020. The banksaid that global growth in 2020 will accelerate to 3.3% from 2.9%. Thisforecast was weaker what the bank predicted back in October 2019, it stood at3.4%.  Nonetheless, the optimism was embedded in fine details where thebank mentioned that the downward risk is “less skewed”.

BOJ Leftthe Powder Dry

Market participants are also disappointed about the Bank of Japan’s monetary policy decision during which it decided to leave the monetary policy unchanged. This means no further stimulus package which the markets are addicted to.  

Focus onDavos

For now,the focus is on the World Economic Forum’s annual meeting in Davos.

Ahead ofthe World Economic Forum’s annual meeting, traders have developed a broadrisk-off move today and this has led a rally in safe havens such as USTreasuries and the yen. The WEF’s meeting is going to be the major theme duringthe European session. This is because influential individuals will occupy thestage and among them is President of the United States, Donald Trump, who isslated to speak later this morning.

ATransatlantic Truce

PresidentTrump has shown a soft side in his latest tweet by agreeing to a truce betweenthe US and France over their dispute about digital taxes. Both countries havedecided not to impose punitive tariffs this year.  Although, the deal hasnot been set in stone and there is always a risk of things getting off therails. However, the current tone has started to defuse transatlantic tensionswhich could always trigger another trade war. If a trade war breaks out betweenthe US and Europe, the consequence could be a lot more profound because Europeis a much larger trading partner with the US as compared to China.   

All EyesOn Trump

If Donald Trump delivers a more optimistic tone during this opening speech, it would prompt traders to take riskier bets and in the absence of such narrative, one would expect the markets to flash deep red colour. It is important to remember that the volatility of the STOXX 50 stocks jumped 5.2% yesterday but it is still down over 19 percent YTD. A negative tone by the US president may prompt traders to bet against the markets.  

EconomicData

In terms of the economic docket, we have the UK’s average earning index and other key unemployment data points. There is no doubt that the bets are mounting for an interest rate cut by the Bank of England. The bank’s monetary policy decision is due next week. The forecast for the average earning index is for 3.1% against the previous rating of 3.2% and the claimant count change is expected to print 33.4K. Only a substantial change in the unemployment picture could trigger an interest rate cut. Looking at the overall economic picture so far, we do not envisage an interest rate next week.

Later on,we also have the German  ZEW economic sentiment and the forecast is for15.2 while the previous reading came in at 10.7.

OilRally Fades

Oil rally fades as investors started to factor in the reality of supply and demand. Libyan oil production makes a very small part of global oil supply, and right now, the issue is with demand rather than supply.