January 24, 2020

Risk-On Trade Back In Town

European markets are trading higher and investors are partaking in riskier assets on the back of the European economic data which was somewhat positive. The French flash services PMI printed a stronger reading of 51 against the forecast of 50.4.

European markets are trading higher despite the fresh warning from the credit rating agency, S&P, it issued a caution about Chinese economic growth. The agency has warned that if the virus situation continues to worsen, it could easily shave-off 1.2 percent points from Chinese economic growth.

This particular statement has made investors to asses the risk associated with Coronavirus. 25 people have died and 830 are infected. China has extended the travel ban, nearly 11 cities with a population equivalent of Canada have been restrained from traveling. These efforts are made in order to ring-fence the outbreak of coronavirus but we think it is nothing more than a Band-Aid solution. The fact is that we do not know much about this virus, and there is no vaccination or cure yet makes it dangerous. More importantly, we are not even sure how to turn it off. This makes the situation scary. Having said this, the WHO still maintains its stance that the outbreak doesn’t really constitute a global threat and this is kept nerves calm over on Wall Street.

The US stocks continued to talk with its record high but closed shy of these levels. The S&P500 index climbed 0.1% While the NASDAQ index gained 0.2% but the Dow index fell by 0.1%.

All Eyes on UK PMIs

In the currency markets, it is all about the PMIs data. Let’s begin with the British pound. It is likely to see a higher volatility today due to the upcoming economic data. The purchasing managers’ index for the UK has been touted as a potential game-changer for the Bank of England’s interest rate decision. The money market is expecting a 60% chance of a rate cut by the BOE on January 30th.  

The flash manufacturing PMI and the services PMI are expected to print 48.8 and 51.1 respectively. The data is likely to impact and the currency and the gilts.

The one week implied volatility for Sterling has increased and touched the highest level since December. In simple terms, a one-week risk reversal confirmed a bullish sentiment for the British pound that is not seen in nearly 2 months.  

What Is More Important? Trade War Or The ECB Policy

It wasn’t the ECB’s monetary policy decision which took the center stage yesterday; fear of a trade war between the US and the EU impacted the price action of the Euro. The European Central Bank left the policy unchanged (as expected) yesterday and the reaction of the Euro on the back of their monetary was immensely boring.

Strategic review Doesn’t Mean Agreement

Basically, the ultra-loose monetary policy remained unchanged yesterday as the president of the European Central Bank took the stage for the second time. She promised that the bank will examine its policies and if it should alter its 200 billion Euro corporate bond holding. She wants to factor in climate change in the banks’ policies. Miss laggard has set out an ambitious framework along with the deadline for this review which is December.

The deadline for her strategic review of the monetary policy is not only going to keep her in hot water, but it is also going to trigger bruising debates on the divisive issues.

The fact is that laggard has an ambitious agenda and we anticipate only minor changes due to the compressed timetable. The division among the policy member is a momentous challenge, thus one needs to fine-tune their expectation with respect to the strategic review. This is because a review doesn’t mean a resolution. For this to work, you need an agreement among all parties and this is the biggest obstacle.

Gold Set To Finish The Week Higher

Gold prices have come off from their highs on Friday but set to close the week in positive territory. The WHO’S assurance has made investors bid for riskier assets.

Technically speaking, the current pullback in the gold price looks like an opportunity to buy, the price is still trading above all the major moving average, 50, 100 and 200.  This confirms that the bulls are in control of the price action. The current support level is at $1,504, this is where the 50-day smooth moving average is. The resistance is capped by the previous high of $1,611.