US markets ended mixed overnight, the Dow eked out a fresh all-time high, whilst the S&P closed down at 3 points at 2838 and the NASDAQ shed 0.6% to 6919. A weaker dollar and stronger earning had initially sent the US equity indices higher; however, these gains were quickly reversed as US Commerce Secretary Wilbur Ross hinted at souring Sino-US trade relations.
US politicians smash the dollar
US Treasury Secretary Steve Mnuchin’s public welcoming of a weaker dollar not only broke with tradition, but also gave dollar traders a clear short-term sell signal. Following an assertion by Mnuchin that a weaker dollar would support trade, investors filled in the blanks with the assumption that the US government could be intentionally looking to depress the value of the dollar to boost the economy.
Not needing to hear the warning twice, investors quickly sold out sending the dollar to fresh three-year lows. The dumping of the dollar continued overnight in Asia, pulling the greenback sub 89.00 versus a basket of currencies. 2018 has so far seen a relentless sell off in the dollar and with a distinct lack of any obvious catalysts on the horizon that could change the fortunes of the dollar in the near term, the outlook for the greenback doesn’t point to an improvement any time soon.
GBP/USD tests $1.43
GBP/USD has been a standout winner, as a combination of pound strength and dollar weakness meant the pound could continue its recovery back to levels not seen since before the Brexit referendum. GBP/USD jumped 1.6%, its biggest one-day gain in nine months, to close comfortably above $1.42 handle, before surging on to test $1.43 in Asia overnight. Speculative interest to see the pair target $1.45 in the coming sessions, should the current climate persist. Any pullback are likely to be considered buying opportunities.
Euro at 3 year high heading towards ECB announcement
Meanwhile, EUR/USD was also trading at 3-year highs as investors switch their focus to the European Central Bank (ECB) monetary policy announcement later today. Any change in forward guidance is looking very unlikely and with the euro trading over $1.24, ECB President Draghi may be tempted to push back on its recent strength. However, given the strong start for the eurozone economy in 2018, Dovish comments from Draghi could look misplaced. Draghi could soften his tone marginally in order to acknowledge the robust economic recovery that the eurozone is experiencing. However, the ECB President will need to skilfully walk a thin line, not wanting to sound too hawkish and run the risk of sending the EUR/USD further towards $1.25.
Commodity update
The weaker dollar and concerns over souring relations between the two largest economies in the world sent gold soaring to its highest intraday level since 2016, up $17 in the previous session to $1358.
WTI crude has also been a standout performer on the back of a softer dollar and improved inventory readings. WTI closed over 2% higher in the previous session, experiencing its first break above $65 per barrel since 2014. The bull run has continued this morning with the black stuff jumping another 1% in early trading. whilst Brent hit a fresh three-year high of $71.05.
European Open
The stronger European currencies mean that indices across Europe are looking at a softer start. FTSE futures see the UK index started trading some 23 points lower. Given the rally in commodities we can expect to see commodity stocks in the spotlight.
More from Davos
Davos doesn’t usually attract the amount of attention that it has this year, but given some of the comments and reactions so far, the markets will be watching closely as Trump takes to the podium in his State of the Union address, on Friday. Market participants will be particularly interested to assess the level of importance that Trump intends to put on trade policy this year and gauge a level as to the amount of protectionism that it could entail.
Opening calls
FTSE to open 6 points lower at 7637
DAX to open 3 points higher at 13,417
CAC to open 2 points higher at 5497