Sun, Feb 05, 2023 @ 17:26 GMT
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US Equities Bounce, But Strong Safe Haven Demand Hints At Limited Further Recovery

US stocks recorded a fascinating rally on Monday. The Dow surged 5.09%, the S&P500 spiked 4.60% and Nasdaq gained 4.49% as equity investors made a strong return on reassurance that the world’s leading central banks, including the Federal Reserve (Fed), the Bank of England (BoE) and the Bank of Japan (BoJ) would do whatever is in their power to fix the coronavirus chaos.

Most Asian stock markets followed up on New York gains. The ASX 200 gained on improved risk appetite, recovery in oil prices and the 25-basis-point cut from the Reserve Bank of Australia (RBA). The Aussie held ground above the 65-cent mark against the greenback, as the RBA’s action was fully priced in.

G7 finance ministers and central bankers will give a teleconference today to discuss their plan to combat the coronavirus shock on the economy.

The Bank of Canada (BoC) is expected to lower its rates from 1.75% to 1.50% on Wednesday’s monetary policy meeting.

Shanghai’s Composite (+0.74%) and Hang Seng (+0.24%) recovered for the second straight day, but stocks in Japan reversed earlier gains as consumer confidence fell to 38.2 in February, the weakest since October, and the yen strengthened.

WTI crude advanced past $48 a barrel on hope that the additional cheap cash supply from central banks would boost the energy demand and lift oil prices. Plus, OPEC will meet on March 5-6 and will likely curb production with or without the support of Russia. For now, WTI is expected to hold on to its recent recovery on expectation of improved risk appetite and a tighter OPEC supply. But the risk is, not any cut would do. Any disappointment from OPEC could send the market into the bears’ hands by the end of this week.

Gold fluctuated within the $1575/1600 range. Disrupted negative correlation between gold and risk assets combined with a high load of net speculative longs hint that trading in this market could be unpredictable and volatile in the coming days. Support is seen near the 50-day moving average, which currently stands near $1568.

But demand for safe haven currencies remained intact. The Swiss franc and the yen gained in the overnight trading session. The USDCHF slid below 0.96 and the USDJPY consolidated under the 108 mark, suggesting that there is some uncertainty regarding the sustainability of the US recovery on Tuesday and we may not see another bang at today’s trading session.

US stock futures edged lower in Asia, then reversed early weakness.

FTSE (+0.93%) and DAX (+0.94%) futures hint at a positive start as European traders walk in, yet gains may be fragile.

The euro extended gains to 1.1155 against the US dollar, as the US yields consolidated at historical lows on expectation that the Fed may slash rates by 50 basis points, double the 25 basis-point standard cuts. Rising dovish Fed bets should continue weighing on the US dollar and encourage a further advance toward the 1.12 mark. However, the European policymakers can not sit with their hands tied faced with the coronavirus outbreak, which has been spreading within Europe and threatening the economic activity. Once the market is done pricing in the dovish Fed expectations, it may the ECB’s turn.

Across the Channel, the selling pressure on the pound becomes stronger as trade negotiations between the British and European policymakers hint that the UK may crash out of the bloc with no deal in hand. No-deal Brexit worries should encourage a further Sterling sell-off. Cable could extend losses toward the 200-day moving average, near the 1.27 mark.

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