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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The unambiguous ‘risk on’ profile keeps on going with no end in sight so long as the US and China continue to signal that a more protracted trade deal is in the making or we get evidence that supply is retuing back into the equity markets. We imagine the Fed Put is undoubtedly also working it magic too.
The offer by China to reduce the trade surplus to the US to zero by 2024 was enough for risk-seeking strategies to perform exceptionally well, even if significant uncertainties still remain as the US maintains its hardline stance by demanding more ambitious concessions if a deal is to be sealed. For instance, the US is looking to reduce the trade deficit it has with China over 2y.
For now, the net result is clear, as the bellwether for equities (ES) jumped by over 1.5% led by Industrial Goods with Technology also faring well.
The ebullient mood received an accelerant by higher yields in the US fixed income market, where the US 30-year bond rate is now retesting 3.1% daily resistance as flows head back into riskier bets (equities). The US Dollar, against conventional belief, is also riding higher on the risk-friendly mode, as the Euro and the Chinese Yuan trade on the backfoot.
It’s worth noting that the renewed momentum in the USD, technically speaking, allows further upside leeway after the breakout of a 1-week long range in the DXY. The break lower in Gold also solidifies the outlook for the USD short-term, an important development to strengthen the ‘risk-on’ tone.
Interestingly, the improved sentiment has been spreading into the broader market spectrum, with equity investors retuing with a higher degree on confidence into inteational markets such as the Euro Stoxx 50, China’s CSI 300, Hang Seng, Nikkei to name a few, all rising with vigor as the market keeps discounting the removal of the Chinese tariffs by the US in retu to more reciprocal and fair trade conditions. What’s more, the renewed commitment by the Chinese govement to flood the system with additional liquidity via fiscal and monetary easing is also underpinning the risk profile.
The conditions heading into Monday, therefore, qualify as a USD strength environment within a risk appetite context. All eyes will now be fixated in the Chinese data due at 2 GMT (GDP, Asset Investment, Ind Prod). With the US on holidays due to Martin Luther King commemoration and the US govement shutdown prolonged further, it’s quite likely that the outcome from China will set the tone for the rest of the day.
The heightened risk appetite seems to have encouraged the market to retu into the carry trade via lower-yielding currencies the likes of the Euro and the Yen. The weakness in the former has manifested into the breakout of its multi-month range point of control circa 1.1375, which allows further downside towards 1.1345–50, an area of dual support based on the tests from late last year. The continuation of the downward pressures has the backing of a bearish 5-DMA, alongside the short-term momentum in the German vs US bond yield spread. Even if the macro bond yield spread divergence is still present for all to see, there is no price action evidence that suggests the market is looking to tu around as of today, hence one must be cautious.
The relatively easier gains in the pair have been made and it should get much harder to make progress from here on out even if the signals via the DXY and US fixed income continue to support the buying on dips campaigns based on the universal 5-DMA upward slopes we are seeing. The acceleration from Friday stopped on its tracks around the 109.80, with the close unable to achieve any higher levels. This is significant as the level coincides with the backtest of a major swing low from back in Aug 21st now tued resistance.
The bias for the Aussie is far from clear, as we are getting contradictory signals. The strength via the DXY is keeping the sell-side pressure alive, while the buoyant risk on appetite as depicted by the 5-DMA upward slope in the S&P 500 (orange line), alongside a higher Aus vs US bond yield spread (blue), should limit the downside as strong dip buying is likely to be quite active under this environment. Throughout last week, it became clear that 0.72/7210 is a major selling stronghold, capping the price from making further progress for the last 6 days in a row, even as the China-US trade talks are heading in the right direction. Should the US Dollar keeps its strength intact and the risk debilitate, that would be music to the ears of sellers.
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