In the early weeks of 2019 it is likely that the progress of the trade negotiations between the US and China will be crucial for risks sentiment. Almost everything else is looking concerning for global markets (continued deterioration of data pointing to a global cyclical downturn, US Government shutdown, continued Brexit uncertainty). However, there are signs of positivity in the US/China talks this week (stretched into a third day due to progress being made) which is allowing risk appetite to improve once more. There will need to be substantive progress on market access, along with protection of intellectual property for the market to take it as an unambiguous positive, but there is traction in the talks seemingly. Equities are feeling the main drive of recovery, with Wall Street another percent higher. There has also been a decisive bounce on oil, with WTI having bounced an incredible 19% in just over two weeks. This positive risk is driving a reversal of the flight to safety, with Treasury yields higher (albeit with a flattening yield curve), gold slipping and the yen unwinding. However also, we see the dollar performance ebbing away. The continued progress in US/China talks would be dollar corrective.
Wall Street closed decisively higher once more with the S&P 500 +1.0% whilst futures are showing further gains of +0.3% early today. These gains have helped Asian markets stronger with the Nikkei +1.1% and Shanghai Composite +0.8%. The gains are solid coming into the European session, with FTSE 100 futures and DAX futures both around half a percent higher. In forex, there is a risk positive look across the majors, with the yen underperforming, whilst the commodity currencies (Aussie, Kiwi and Canadian dollar) are stronger. The euro and sterling are also making gains on the dollar. In commodities, the stalling of the gold rally continues, whilst the recovery in oil is also ongoing.
Looking at the economic calendar the European data seems to be broadly limited to the Eurozone Unemployment for November at 1000GMT which is expected to stay at 8.1% (8.1% in October). The Bank of Canada monetary policy decision is at 1500GMT and analysts seem to be split on whether there will be a 25 basis point hike to +2.00% (from +1.75%) which could heighten volatility on the announcement. US EIA Oil Inventories are at 1530GMT which are expected to show a drawdown in crude stocks of -3.4m barrels (flat last week) with distillates building by +3.4m barrels (+9.5m last week) and gasoline building for +3.1m (+6.9m last week). The key release on the calendar will be the FOMC minutes for the December meeting at 1900GMT which will see the market focused on the groundswell of voices on the committee calling for a slowdown in hikes. Also today there are a bunch of central bankers speaking. For the FOMC there is Charles Evans (a voter in 2019, broadly centrist) at 1400GMT and Eric Rosengren (voter in 2019, hawk) at 1630GMT. UK traders will also keep an eye out for Bank of England Governor Carney who is speaking at 1530GMT.
Chart of the Day – EUR/JPY
The yen has spent the past few sessions unwinding the effects of the flash crash last week. However, as the market settles, the outlook for the yen remains positive and this rebound looks to be a chance to sell. The rebound has simply unwound t