Trade talks continue as Trump vows to build the wall
The U.S. stock markets closed slightly down overnight, shrugging off a worse-than-expected December retail sales report, which plunged 1.20%. Despite this, the U.S. dollar contained its run as the big dog on the block, gaining against all of the majors except the yen, where on target GDP numbers and a slightly elevated risk-averse environment saw USD/JPY fall to 110.50. A healthy degree of scepticism surrounding the accuracy of the retail sales number could explain the almost zero impact on stocks and the dollar, because it doesn’t tally with the strong non-farm payrolls data or wage-growth data from the same period. The retail sales number could potentially be revised upwards in the coming months.
Elsewhere, German and Euro-zone GDP data showed the Euro-zone still bouncing along the bottom activity wise, although narrowly avoiding an official recession. This may well keep the pressure on Brussels as we reach the climactic final episode of Brexit. Euro-zone politicians may way wish to tread carefully in treating the U.K. too harshly or being too belligerent and shooting themselves in the foot. Imposing an economic shock on Britain will undoubtedly flow strongly to the Euro-zone as well and could tip them into a full-blown recession. A cynic might say this is, in fact, PM May’s strongest negotiating position as Brexit runs to the wire. Both the euro and sterling may continue to be hard to love in the coming weeks.
The markets breathed a sigh of relief as President Trump agreed to sign a no-wall funding deal. His intentions to signal a national emergency to buy 2,000 miles of bricks and barb wire will be an internal domestic issue and should have no impact on the markets.
With this in mind, attention now turns to the final day of this round of the U.S.-China trade talks. So far, mixed messages have emerged, giving the impression that China is rather like a worm on a hook at the moment when it comes to the crux issues of its business practices. Given this, it seems unlikely that simply offering to buy more soybeans, oil, airliners and computers to close the deficit will cut it this time. Still, no news is good news and short of a total breakdown (unlikely), the markets will continue to watch and wait with bated breath. Even if President Trump grants a final extension to the deadline, tensions in the markets should remain benign as this would signal genuine intent from both sides to reach an amicable solution. We could then all turn our attention to Brexit on March 29. Wonderful.
FX
The U.S. dollar has held up very well overnight despite poor data. Bad news from the trade talks would be reflected in a sell-off of regional currencies rather than the dollar. Against the majors, the dollar reigns supreme with any sell-offs likely to be fleeting as reality bites on the data front around the world.
Stocks
The regional markets will adopt a wait-and-see approach today as they anticipate news from the trade talks. We expect muted sideways trading following North America’s session.
Gold
Gold jumped seven dollars to 1,312.00 an ounce as the main beneficiary of the poor U.S. retail sales data. Traders also chose to hedge their risk ahead of the trade talks’ conclusion and the weekend by buying gold. Gold continues to constructively consolidate above 1,300.00 in the medium term.
Oil
Oil's rally continued unabated overnight with Brent rising 1.50% and WTI nearly 0.80 %. Oil futures have continued their march higher in early Asia trading and the black gold looks set to enjoy a frothy session. Oil is perhaps the market most bullish in the face of the ongoing trade talks. Another supporting factor perhaps overlooked by most overnight is Cuba accusing the U.S. of moving special forces to the vicinity of Venezuela ahead of a possible “humanitarian” intervention.