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Wednesday February 20: Five things the markets are talking about

March 1 deadline is “not a magical date

News on the trade front and the Federal Reserve minutes, due this afternoon (2:00 pm ET), will help decide whether equities can extend their 2019 winning streak.

Stocks in Europe and Asia found traction overnight as U.S equity futures drifted with the market awaiting the release of minutes from the FOMC and ECB this week. The dollar is steady, and the yuan has rallied after a report that America is asking China to keep its currency stable.

For the other major currency pairs its business as usual – the EUR/USD is still driven by two weaknesses, bleak economic indicators in the U.S and dovish remarks from Fed members, while GBP/USD is still trading firmer, with the market convinced that a Brexit withdrawal deal will be reached by March 29. Nevertheless, intraday sterling volatility is expected from today’s discussion between the U.K and the EU regarding a Brexit deal (02:30 -m ET).

Elsewhere, gold trads atop of its 10-month highs amid increasing bullishness while West Texas crude oil trades above $56.

On tap: FOMC monetary policy minutes (02:00 pm ET) and Aussie employment change (07:30 pm ET).

1. Stocks see the light

In Japan, the Nikkei closed at another nine-week high overnight, as hopes for Sino-U.S trade talks helped lift cyclical stocks such as autos and index-heavyweights including SoftBank Group. The Nikkei share average ended +0.6% higher, the highest close since Dec. 17, while the broader Topix gained +0.4%.

Down-under, Aussie stocks faltered overnight, as gains in resource stocks failed to lift broader market sentiment following a bleak outlook for the consumer and property sectors. The S&P/ASX 200 index declined -0.2% after rising +0.3% on Tuesday. In S. Korea, stocks ended at a four-month high overnight as a weaker dollar boosted appetite for S. Korean stocks amongst foreign investors. The benchmark Kospi closed up +1.09%, with Samsung Electronics leading the gains.

In China and Hong Kong, stocks edged higher as Sino-U.S trade talks seem to be progressing. The Shanghai Composite Index settled +0.2% higher, while the blue-chip CSI300 gained +0.4%. While in Hong Kong at the close of trade, the Hang Seng index was up +1%, while the Hang Seng China Enterprises index also ended +1%.

In Europe, regional bourses are trading higher across the board following a mostly higher session in Asia overnight and slightly lower U.S futures.

U.S stocks are set to open in the ‘red’ (-0.12%).

Indices: Stoxx600 +0.09% at 369.32, FTSE +0.05% at 7,182.75, DAX +0.24% at 11,336.73, CAC-40 -0.01% at 5,160.23, IBEX-35 +0.26% at 9,160.19, FTSE MIB -0.25% at 20,178.50, SMI +0.50% at 9,305.50, S&P 500 Futures -0.12%

2. Oil dips as surging U.S supply counters OPEC cuts, gold higher

Oil prices slipped from this year’s high overnight, with surging U.S supply and slowing economic growth capping price gains supported from supply cuts led by OPEC+.

Brent crude futures are at +$66.41 per barrel, down -4c from yesterday’s close, though still not far off their 2019 high of +$66.83 per barrel print on Monday. U.S West Texas Intermediate (WTI) crude oil futures hit 2019 highs of +$56.39 per barrel earlier this morning but has slipped back to +$56.16 per barrel.

Note: OPEC and Russia agreed late last year to cut output by -1.2M bpd to prevent a large supply overhang from swelling.

Crude ‘bears’ expect OPEC-member and top crude exporter Saudi Arabia to reduce shipments of light crude oil to Asia next month as part of the effort to tighten markets. Because of the cuts, crude ‘bulls’ expect Brent to average +$73 per barrel and WTI to average +$66 by year end.

Nevertheless, standing against the supply cuts is U.S crude output, which has soared by more than +2M bpd in 2018 to a record +11.9M bpd due to a “booming shale oil production,” which the EIA yesterday announced that it expects to keep rising.

Ahead of the US open, gold has rallied to a fresh 10-month high as the ‘big’ dollar struggles ahead of the U.S Fed’s policy meeting minutes. Spot gold is up +0.1% at +$1,342.46 per ounce after rising to a high of +$1,346.73 earlier in the session. U.S gold futures are steady at +$1,345.40.

Note: Expect investors to look for direction from the Fed’s minutes at 02:00 pm EDT – The ‘dovish’ shift over the year-to-date has improved the fundamental outlook for gold prices.

3. Italian yields remain elevated

Italian government bond yields backed up +5 to +6 bps across the curve yesterday after data this morning showed industrial orders in the euro zone’s third-largest economy dropped -5.3% in December over the same month in 2017.

Italy’s 10-year BTP yield was last up +6 bps at +1.74%, pushing the gap over German 10-year Bund yields to +273 bps – 10 bps wider on the week.

Elsewhere, the yield on 10-year Treasuries has decreased -1 bps to +2.64%. In Germany, the 10-year Bund yield has dipped -1 bps to +0.10%, atop of the one week low, while in the U.K, the 10-year Gilt yield has dipped -1 bps to +1.164%.

4. Dollar not in demand

EUR/USD (€1.1339) is a tad higher and back within its recent six-month trading range between €1.13-15 area. Data this morning from Germany shoed that Jan PPI data (+0.4% vs. -0.2%) was a tad stronger month-over-month.

GBP/USD (£1.3030) is slightly softer by -0.2% to move off its recent two-week highs. The focus remains on today’s upcoming talks between UK PM May and EU Commission President Juncker.

Note: A spokesman for PM May confirmed that she will be looking for a legally binding concession on the Irish backstop. A vote is due to take place in parliament next Wednesday 27th February. Assuming May is unsuccessful today, realistically there are really only two ways forward – either a cross-party compromise, or a new referendum. A delay in Brexit is starting to look inevitable.

The USD/CNY (¥6.7212) traded at a multi-week low overnight as Sino-U.S trade talks continue. Trump has expressed flexibility with a March 1 trade-deal deadline. The U.S is seeking a stable yuan to be part of any agreement.

5. German PPI

German data this morning showed a sharp surge in the German PPI figures. The index of producer prices for industrial products (PPI) rose by +2.6% compared with the corresponding month of 2018.

The Federal Statistical Office (Destatis) also reported that the annual rate of change all over had been +2.7 %. Compared with the preceding month December 2018, the overall index increased by +0.4% in January 2019.

In January 2019, the price indices of all main industrial groups increased compared with January 2018 – energy prices rallied by +7.2%, compared with a +0.6% print in 2018.

EUR/USD is showing little movement on Wednesday, after posting gains in the previous two days. Currently, the pair is trading at 1.1339, down 0.02% on the day. It’s a light day for fundamentals, with no major events. In Germany, PPI rebounded with a gain of 0.4%, beating the estimate of -0.2%. Later in the day, eurozone consumer confidence is expected to post a second straight loss of -8 points. There are no data releases out of the U.S., but investors will be keeping a close eye on the Federal Reserve minutes from the January meeting. Thursday will be much busier. Germany and the eurozone will publish PMIs and the U.S. releases durable goods and unemployment claims.

If recent comments out of the Fed are any indication, the minutes from the January policy meeting are likely to be dovish. The Fed has sent signals that it will ease up on rate policy this year, after aggressively raising rates four times in 2018. The January rate statement had a decidedly dovish tone, as policymakers discarded previous pledges of “further gradual increases” in interest rates, and said it would be “patient” before any further hikes. The current Fed projection calls for two rate hikes this year, but that is subject to change, based on the strength of the U.S. economy. The markets have priced in a hold on rates for the near-term, with little expectation of a rate hike in the first half of the year.

With the eurozone and Germany experiencing an economic slowdown, it’s no surprise that investors and analysts are pessimistic about the economic outlook. The ZEW economic sentiment surveys remained mired in deep freeze in February, with scores deep in negative territory. Still, there was a silver lining in the German release, as the readings have improved steadily over the past four months – back in October, the score was -24.7 points. In the first quarter of 2018, the readings were in positive territory, as the German economy was performing well. However, optimism then dissipated, as the global trade war intensified and the German economy slowed. It has been a similar story with the eurozone, as ZEW economic sentiment scores have been in negative territory since the second half of 2018.

EURUSD outlook remains higher towards 1.1400 zone as more gain is expected. Support lies at the 1.1300 where a break will target the 1.1250 level. A break below here will target the 1.1200 level. Further down, support lies at the 1.1150. On the upside, resistance resides at 1.1400 level with a break through there opening the door for further upside towards the 1.1450 level. Further up, resistance comes in at the 1.1500 level where a violation will expose the 1.1550 level. All in all, EURUSD continues to threaten further upside pressure.

During the previous trading session, the currency exchange rate was supported by the simple moving averages to break the resistance level of the weekly R1 at 1.1345. On Wednesday morning, the rate was located above the weekly R1 at the 1.1345 mark.

It is expected that the European Single Currency will appreciate against the US Dollar to the 1.1400 level. Besides, the weekly R1 at 1.1345 should support the surge during the day.

On the other hand, during today's US FOMC Meeting Minutes release at 19:00 GMT, the European Single currency could depreciate against the US Dollar to stay at 1.1360.

During Tuesday's trading session, the British Pound appreciated against the US Dollar by 143 pips or 1.11% to end the trading session at 1.3055. On Wednesday morning, the rate slumped to the 1.3030 mark.

Due to a massive surge during yesterday's trading day, it is expected that the rate might trade sideways during today's trading session. Most likely, the British Pound will trade at the 1.3000 level.

However, the British Pound could depreciate against the US Dollar towards the monthly PP at 1.2924 during today's US FOMC Meeting Minutes release at 19:00 GMT.

During the previous trading session, the currency exchange rate passed the resistance level of the 61.80% Fibo as it was predicted. During Wednesday morning hours, the rate was trading sideways to be located at the 110.76 mark.

It is expected, that the US Dollar will continue to appreciate against the Japanese Yen with the help of today's US FOMC Meeting Minutes release at 19:00 GMT which could push the rate to break the resistance of the monthly R1 at 110.99.

On the other hand, the US Dollar could depreciate against the Japanese Yen during the release. In this case, most likely, the rate could depreciate to the 110.60 level.

During the previous trading session, the yellow metal broke the resistance level of the monthly R1 at 1,340.10.

In regards to the near-term future, most, likely the gold will keep surging to the 1,350.00 level.

However, today's US FOMC Meeting Minutes release at 19:00 GMT could push the yellow metal to depreciate against the US Dollar towards the 1,335.00 level.

The single European currency appreciated about 77 base points against the Japanese Yen on Tuesday. The currency pair broke a dominant descending channel during yesterday's trading session.

The exchange rate began Wednesday's session with an upside movement. The pair tested the upper boundary of a junior ascending channel during the Asian session.

Most likely, the currency exchange rate could aim for a support level formed by the 50-hour simple moving average at 125.24.

On the other hand, the pair might reverse from the current price level and dash through the junior ascending channel.

The Australian Dollar appreciated about 69 base points against the US Dollar on Tuesday. The surged was stopped by a traditional weekly resistance level at 0.7177 during yesterday's session.

The exchange rate hovered below the traditional resistance level during the first half of Wednesday's trading session.

By and large, it is likely that the currency exchange rate could decline towards the 50-hour simple moving average at 0.7141 within this session.

A potential upside movement could be introduced in the market during the following trading hours if the 50-hour SMA holds.

The US Dollar depreciated about 71 base points against the Canadian Dollar on Tuesday. The currency pair broke a medium-term ascending channel pattern during Tuesday's trading session.

Currently, the exchange rate is trading near a support level formed by the weekly S1 at 1.3182.

If the currency exchange rate passes the support level, bears could push the pair towards the 1.3153 region.

However, if the support level as mentioned earlier holds, a potential upside movement could be expected within this session.