Opening Bell: Risk-On Roars Back; Gold, Yen Fall; Oil, Dollar Gain

Key Events

This morning, traders in Europe and Asia took their cues from their American counterparts. The prevailing narrative during yesterday's US session, which today has been driving Asian and European market activity says that at best, a trade war will be averted altogether, and at worst, the first synchronized global economic expansion since the Great Recession will not be much the worse for wear.

The return of risk-on sentiment boosted the dollar and yields. Right now S&P 500 Futures and NASDAQ 100 Futures are both trading higher, up 0.36 and 0.57 percent respectively at time of writing.

Global Financial Affairs

Asian stocks bounced from two-month lows earlier today after yet another about-face in investor sentiment. Shares listed on Japan's TOPIX and Australia's S&P/ASX 200 led the region higher. Chinese traders had no opportunity to weigh in, as markets were closed both on the mainland and Hong Kong.

Technology shares and miners led the Stoxx Europe 600 higher.

European and Asian shares this morning followed what appeared to have been a miraculous recovery yesterday during the US session after US futures plunged before the market opened. But at the end of the US trading day, despite the ominous signals sent at the open when the major indices all headed lower, each closed higher on the day. The Dow gained 0.96%, the S&P 500 finished 1.16% higher and the NASDAQ Composite fared even better, up 1.45%.

Beleaguered high-tech giant Facebook (NASDAQ:FB) fell today in pre-market trading and looks set to erase its Wednesday gains after the company announced that its data breach problems had widened. Indeed, it now appears most of its 2 billion users could have been accessed improperly.

The S&P 500 recovered from a 1.5 percent slide, recording a 1.16 percent gain at the close, extending a consolidation to its eighth day. Technically, yesterday's recovery was a return-move to a bearish pennant, from which point the index may turn down.

US 10-year Treasury yields followed suit, recouping a 3 basis point decline to close 2 basis points higher.

This newfound optimism followed calming statements by both US and China representatives that negotiations are higher on the agenda than implementing tariffs. Larry Kudlow, the White House's new National Economic Council Director, noted:

Remember, none of the tariffs have been put in place yet. These are all proposals. We're putting it out for comment. There's at least two months before any actions are taken. China by the way did not enact the tariffs.

China's ambassador to the US, Cui Tiankai, said, "Negotiations would still be our preference, but it takes two to tango. We’ll always stand for consultation and negotiation, but if others do things in the wrong direction, we’ll have to respond.” Traders focused on the positive portions of his statement today, choosing to disregard the not so veiled threat.

Not to be outdone, US President Donald Trump tweeted, "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!"

Still, investors aren't the only ones finding it difficult to decide on the true chances of reciprocal tariffs being imposed by the world's two largest economies. Federal Reserve officials highlighted the difficulty in assessing the impact of the trade dispute uncertainty to an otherwise bright global economic outlook.

Board member, Lael Brainard said trade policy is "certainly something that I take into account, in thinking about risks.” The escalating trade dispute adds another layer of uncertainty to what has otherwise been a positive outlook for jobs, inflation and monetary policy.

No matter the outcome, however, one thing is certain, volatility has returned to markets after a long absence. This new reality begs the questions: can investors adapt to intraday swings after years of calm, or will the new market environment force hedge funds and institutions to exit positions they acquired based on strategies built for calmer markets?

Should the latter prevail, we can expect a significant increase in daily whipsaw activity. Only longer-term investors can withstand such wild moves. Shorter term traders are almost certain to be stopped out. That would in turn fuel additional volatility.

The greater the volatlity, the more traders would rotate out of stocks into bonds, gold and the Japanese yen. That could be a catalyst for an extended correction to the second longest running bull market in the history of the US, irrespective of economic growth.

Currently though, investors continue to rotate funds out of safe havens and into risk, pushing gold and the yen down and yields up.

In other developments, the Australian dollar led declines against the USD after Australia’s three-month bank bill swap rate fell for the first time in almost two months.

Oil gained after a larger-than-expected drop in crude stockpiles. Crude inventories fell by 4.6 million barrels in the last week, compared with analyst expectations for an increase of 246,000 barrels. The news added to the risk-on sentiment, as the market narrative surrounding the US-China tiff flipped and fears of decreased global growth calmed.

The price of WTI crude recuperated from a heart-stopping 2.25 percent plunge yesterday to close 0.12 percent higher, producing a powerful bullish hammer, with an exceptionally long lower shadow, confirming the integrity of a rising channel.

Bitcoin held below $7,000.

Up Ahead

• Eurozone producer-prices and purchasing-managers data is due Thursday.
• The key US monthly employment report is released Friday; the jobless rate was forecast to have fallen in March after holding at 4.1 percent for five straight months.
• The Reserve Bank of India decides on policy on Thursday.

Market Moves

Stocks

• The Stoxx Europe 600 jumped 1.5 percent, hitting the highest in more than two weeks.
• Futures on the S&P 500 Index rose 0.5 percent to the highest in more than two weeks.
• Japan’s Nikkei 225 Stock Average gained 1.5 percent to the highest in almost three weeks.
• The MSCI Emerging Markets Index climbed 0.6 percent, the biggest increase in more than a week.

Currencies

• The Dollar Index rose 0.2 percent in the largest advance in more than a week.
• The euro fell 0.2 percent to $1.2251, the weakest in more than two weeks.
• The Australian dollar fell 0.4 percent to 0.769 per dollar, the largest drop in more than a week.

Bonds

• The yield on 10-year Treasuries rose one basis point to 2.82 percent, the highest in more than a week.
• The yield on US 2-year Treasuries climbed one basis point to 2.31 percent, the highest in more than two weeks.

Commodities

• Gold dipped 0.6 percent to $1,325.15 an ounce, the weakest in more than a week.
• West Texas Intermediate crude climbed 0.2 percent to $63.50 a barrel.