Global stocks were vulnerable to sharp losses during late trading on Wednesday after investors were caught unprepared by the hawkish Federal Reserve minutes. The negative momentum has already rippled into Thursday’s trading session with Asian shares concluding depressed. European markets may be exposed to further downside shocks as anxiety ahead of the Trump-Xi summit dents risk sentiment. Gains on Wall Street may be limited this week with the appetite for risk diminished by signs of the Federal Reserve unwinding its $4.5 trillion balance sheet. The phenomenal stock market rally could start facing serious headwinds moving forward especially when considering how investors have started to question the logic and sustainability of the Trump rally.
Trump-Xi summit round 1
A strong sense of caution has masked the financial markets on Thursday with investors on high alert ahead of the heavily anticipated Trump-Xi summit. With Trump in the past repeatedly accusing China of keeping its currency at artificially low levels against the Dollar and stealing American jobs, the outcome of the meeting is something that remains unknown. If Trump decides to play hardball and maintains his harsh rhetoric on China, then risk aversion may intensify consequently sending investor’s rushing towards safe-haven assets. It must be kept in mind that one should always expect the unexpected with Trump and such could create a possibility of the meeting concluding on a positive note.
Fed hawks support Greenback
Dollar bullish investors were gifted a hawkish surprise on Wednesday after the Fed minutes showed that the Central Bank is planning to shrink its $4.5 trillion balance sheet. Despite the "Dovish hike" in March, the overall tone of the minutes was hawkish which supported the Greenback. With the short-term bulls looking beyond the Trump uncertainty to elevate the Dollar, further upside could be expected if Friday’s NFP exceeds expectations. From a technical standpoint, the Dollar Index is hovering around 100.50 with 101.00 as a possibility if bulls can maintain control. In an alternative scenario, weakness back below 100.25 could open a path back towards the psychological 100.00 level.
Draghi Strikes again
The EUR stumbled lower during trading on Thursday after Mario Draghi stated there was no need to change the current policy path amid the weak inflationary pressures. This dovish statement has quelled the heated expectations of the ECB raising rates at the end of the year with the probability dropping below 20%. As risks in Europe remain tilted to the downside and political uncertainty weighing heavily on sentiment, the Euro could be instore for further punishment. From a technical standpoint, the EURUSD remains heavily pressured on the daily charts. Previous support around 1.0750 could transform into a dynamic resistance that encourages a decline towards 1.0500.
Commodity spotlight – Gold
Gold staged an impressive rebound during late trading on Wednesday with prices closing above $1250 as anxiety heightened ahead of the Trump-Xi summit. Although the impressive ADP report and hawkish Fed minutes enticed bears to enforce some downside pressures, the mounting uncertainty across the board has ensured the metal remains buoyed. With the Brexit negotiations, elections in Europe and Trump developments likely to create a risk-off atmosphere, Gold remains somewhat supported in the medium term. From a technical standpoint, bulls need to break above the stubborn $1260 resistance for the bullish trend to continue.