The FOMC minutes showed that risks related to global trade and growth were diminished after the signature of the phase-one deal between the US and China, but other risks emerged, including the coronavirus outbreak. The Fed highlighted the need to monitor closely the developments related to the coronavirus, but with economic activity growing at a ‘moderate pace’ and jobs market remaining ‘strong’, the Fed’s policy outlook is ‘likely to remain appropriate for a time’. The Fed plans to curb bill purchases starting from the second quarter. But, the activity on the US sovereign bond market suggests that investors expect at least one more rate cut during the second half of this year.
New trading day, new record highs for the US equities. The S&P500 and Nasdaq hit fresh records on Wednesday on a Fed statement judged supportive and on hope that Chinese efforts to contain the coronavirus spread using information technology, a thing they know how to do, would help limit damages. The IMF insisted that there should be a rebound in global growth this year, despite economic activity being clouded by coronavirus worries.
The US 10-year treasury yield remained near 1.55% and the US dollar index advanced to 99.72 sending the USDJPY above the 111 level for the first time in more than a year.
WTI rallied to $54 a barrel.
Energy and technology stocks led gains in New York. Apple shares (+1.45%) recovered early week losses, Tesla closed 6.88% higher.
Stocks in Asia traded mixed, however. Japanese stocks recorded timid gains on softer yen, the ASX 200 gains were led by energy stocks, Shanghai’s Composite advanced 1.84%% as the People’s Bank of China (PBoC) cut the 1-year Loan Prime Rate (LPR) by 10 basis points to 4.05% and the 5-year LPR by 5 basis points to 4.75%, while Hang Seng (-0.23%) and Kospi (-0.67%) edged lower.
FTSE futures (+0.13%) hint at a positive start in London; recovery in oil prices and a cheaper pound should give a support to the energy-heavy index.
In the FX, the euro sales gained momentum after the German Gfk consumer climate data showed deterioration in economic sentiment in Germany versus no change expected. Further weakness in German data boosted the euro bears and paved the way for a deeper sell-off to 1.0777 against the US dollar. The downside prevails.
In the UK, the pound first rallied as inflation jumped to 1.8% in January from 1.3%, faster than expected by analysts. Stronger-than-expected inflation dispelled the Bank of England (BoE) doves but brought along the anxiety that the purchasing power of Brits may take a hit following the decline in wages growth printed a day earlier. Due today, January retail sales data should confirm if this is the case. According to a consensus of analyst expectations, the sales in January may have picked up 0.7% m-o-m versus -0.6% printed a month earlier. Any disappointment should revive worries of weakening purchasing power and weigh on the pound. Sterling traded near its post-election high against the euro on Wednesday and Cable advanced to 1.3022 before diving to 1.29. The reversal was mostly due to the spike in US dollar following news that core producer prices in the US spiked to 2.1% in January versus 1.6% expected by analysts and 1.3% printed a month earlier. But the Fed seems ready to accept a reasonable overshooting in inflation, though there is no consensus on the subject.
In the emerging market space, the Turkish lira traders didn’t welcome the latest 50-basis-point cut from the Central Bank of Turkey under the obvious pressure of President Erdogan. With inflation above 12% and a central bank decided to pull the rates to a single-digit territory, investors feel increasingly uneasy taking the risk of holding the lira. Short lira positions are expected to gain further momentum. It is just a matter of time before the 6.10 resistance is cleared against the US dollar.